What Early-Stage Investors Really Care About

Written by Itay Sagie, co-founder of VCforU.com. You can follow him on Twitter at @itaysagie.

These days, when fundraising has become even more tricky, it is crucial that entrepreneurs get into the investor mindset if they are to increase their chances of success.

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This is not a time to miss opportunities. However, in my line of work, I often find a clash between what entrepreneurs think investors care about and what investors actually care about.

While entrepreneurs believe their technology and their revolutionary products are the most important topic, early-stage investors want to mitigate their innately high risks in exchange for high returns. This results in a very different prioritization and a drastically different mentality between an entrepreneur and an investor.

Early-stage investors seek to reduce risks

As an entrepreneur, you need to understand that early-stage investors take the biggest risk by investing in your company first, before you prove you can deliver on your promises. I find that early-stage entrepreneurs jump to technology, but beyond verifying that the technology works, the investor needs to verify that there is a real need for the offering in the market. Are there potential paying customers? Do you have the right unit economics in place to scale in a sustainable way? Is your team capable of delivering on your ambitious forecast? There are many other issues that investors care about, beyond your technology. Looking at the investor’s mindset from a risk point of view can also help clear up your pitch, your deck and so on.

In my experience, investors tend to look at three main risks, and it is your job as an entrepreneur to try and mitigate these risks as best as you can.

1. Technological risk

Does your technology work, and is it better than the current best-practice?

How do you mitigate the technological risk?

The technology risk is the most trivial to mitigate, and unfortunately where most entrepreneurs get stuck. In order to mitigate the technology risk, you can simply create a working PoC, and do some industry benchmarks to make sure your product can outperform currently available products.

2. Market risk

Is there a real need for your product, are people willing to pay for it? How much? Do you already have paying customers? What is the market size and potential?

How do you mitigate the market risk?

Lacking paying customers, ideally you will find a “design partner,” a potential customer who will help define the basic features that will make your technology usable in a real-life scenario. This will reduce two risks at once: That there is a potential customer and thus real need, and that your product is good enough to be used in a commercial environment. You can now replicate your success and scale your company.

Various market research to identify the market size, trends, growth etc. is also useful.

3. Personal risk

Let’s assume your technology is great and people are willing to pay for your product. Are you the right team to grow this into a multibillion-dollar business which will create value and returns for your investors?

How do you mitigate personal risks?

This is probably the most important and hardest risk to mitigate. Short of having a previous exit history, early-stage investors have very little to go on to assess your personal capabilities in terms of building a large and successful company. They can look at your educational background and work history, they can get an impression of how you interact with them in meetings, how you pitch, how you look, and how you interact with your team and with their team. But all of this still has very little indication that you have what it takes to build a large and sustainable business.

So what can you do as an entrepreneur to prove that you have human capabilities which will indicate a higher potential for success? You can show that you were able to attract a talented team. In an early-stage environment this is not an easy task, one that takes personal gravitas. You can also pitch in a professional way, win startup competitions, get accepted into prestigious acceleration programs and so on. Any major achievement may showcase an indication of personal capabilities.

Looking to the future

Beyond (bias) intuition, some forward-looking investors try to take it to the next level and use textual analysis to assess your characteristics. While it is still early and perhaps controversial, I believe the future will utilize artificial intelligence to gain real insights into the potential success of a particular investment opportunity, and one of the main factors will be a team’s capabilities.

About VCforU

VCforU.com is a leading resource for entrepreneurs raising capital. VCforU serves over 17,000 entrepreneurs in more than 140 countries to create professional investor one pagers and locate relevant investors. VCforU helps investors find relevant startup investment opportunities that match their exact criteria.

Illustration: Li-Anne Dias.