Investors don’t invest in products. They invest in businesses and, specifically, those businesses that have the potential of making them the most money. Some investors may have additional objectives such as to support women-founders or to invest in green technologies, but they are still primarily driven by the desire to make a profit.
Here are the five main criteria that early stage investors use when conducting their due diligence:
1. Market Size: Big markets mean big opportunities. And, big opportunities mean a lot of money. Investors would rather enter a growing market as opposed to a niche or contracting market. When you evaluate your startup idea, consider the size and the growth potential of your market.
2. Product: In today’s world, there are too many products and too many solutions to people’s problems. It is thus no longer an option to create a product that is just a little bit better than the competition. To succeed, your product must be remarkable. It’s even better if it is disruptive. A disruptive solution will give you a competitive advantage and the upper hand as you build your business.
3. Traction: Investors want to invest in businesses that will grow, and what better proof is there that your company can achieve growth than traction? Getting your first customers and receiving positive testimonials is extremely valuable. Not only does it make your future investors more confident that you have the right idea, but it also proves your product-market fit and increases the chances of your success. A large percentage of startups fail because there is no demand for their product. It does NOT have to be you.
4. Scale: We’ve already established that investors are in the game of making money. Therefore, they are not interested in companies that can only make one unit of their product per year, unless each unit is sold at, say, $100M. Instead, investors look for companies which can sell many units per year to many different customers in many different countries. In other words, they like scale.
5. Team: Sadly, most startups fail because they cannot execute. They tend to not have the right people on board to get the job done and fail to follow through with their plans. A stellar team is critical to a company’s success. And, of course, prior startup experience helps! As Michael Jordan said, “Talent wins games, but teamwork and intelligence win championships”.