What Investors are Looking for in Start-Ups

Have you just started a business and are looking for ways to fund it? Are you looking for investors, so you can grow faster and achieve the success you’re dreaming of?

But do you know what investors are looking for in start-ups?

Before we give you the answer, let’s have a look at some funding options you can choose from.

Private equity investors

Private equity firms are third party investing in a business in return for a share of the ownership. The investment can be provided by commercial organisations or private investors but is only available to limited companies. Sole traders and partnerships aren’t eligible for private equity funding. 

Investors achieve a return on their investment through the payment of dividends by the company and through selling their shares.

Examples of private equity investors:

Venture capital

Venture capital firms are commercial organisations that invest money in a business in exchange for a proportion of the company’s shares. These investors usually invest in innovative but risky start-ups hoping they will become successful. 

A lot of venture capital investors make big investments, for example over £1 million.

Business angels

Business angels are private investors that invest in new or growing small businesses. 

They usually provide funding at the initial but crucial moments – when the start-ups are most likely to fail. Most of the time, they invest between £5,000 and £50,000.

Crowdfunding

Crowdfunding is when a business or a project is funded with small donations from many different people instead of one or two major investors. This can be a great option for those businesses that struggle to get a big formal investment.

To learn more about crowdfunding and how to create a successful crowdfunding campaign, read here.

Start-up Loans

A Start-up Loan is a Government-funded loan that supports those who are starting their own businesses or developing a business that has been trading for no more than 24 months. It’s a low interest, unsecured loan of up to £25,000, depending on your business needs. 

The reason the UK Government funds start-up loans is that new businesses are considered to be risky and most other lenders cannot help them.

To be eligible for a Start-up Loan, you need to live in England, Scotland or Northern Ireland, be 18 years of age or older, have the right to live and work in the UK and demonstrate that you can afford to repay the loan.

Business loans

Business loans are available from most high-street banks. If you decide to get a loan, make sure you spend time looking for the best deal. Consider things such as the amount you need, the rate of interest and the repayment period. Also, if you’re a start-up, it’s likely that you’ll have to secure the loan against a personal asset such as your house. 

If you’re looking for funding, finding the best deal can be difficult. To help you with that, we have partnered with Capitalise to deliver tailored funding support to you and your business. Check out our Funding Hub and find only the best options available to you!

No matter what option you choose, these are the main things all investors are looking for in start-ups:

Good business plan

A business plan is an essential document that helps you turn an idea into an actual business. It guides you through every stage of setting up and running as it outlines what actions you need to take in order to successfully launch and grow your business.

But why do investors want to see your business plan?

A business plan demonstrates how you operate your business and what your cash flow predictions look like. It lets investors decide whether it’s worth investing in the business and whether they will receive a return on their investment. It also shows all the details they need to know about your business, including what you offer, what your target market is and how you’re marketing your business.

So if you’re looking for some funding, make sure you proofread your business plan and add any details you have missed.

Investors want to see a great product or service

If you don’t have a good product or service that people are interested in, finding customers will be difficult. The same with investors.

No matter how good your customer service is or how passionate you are about your business, investors care about their money and want to invest in businesses with products or services that have the potential to bring a return on the investment they make.

So how do you know if your product or service is actually good and worth investing in?

A great place to start is by answering this question – what problems are your customers facing and does your product or service solve them?

If the answer is yes, that’s a good sign! Now think about your market. Are there many people that face that problem mentioned earlier? And are there many businesses providing solutions to that same problem?

If the demand is bigger than the supply, investors will see your business as a great option to invest in. If it’s the other way around, investors will see it as a risk, which reduces the chances of receiving the investment.

Even if your start-up operates in a crowded market, there is still a way to attract those investors! You need to prove your business is better than your competitors and you have a unique selling point – a reason why customers will come to you instead of others.

Financial plans

Whether you receive that investment or not, you should be able to demonstrate where you’ll spend your money, where the profits will come from as well as how you will deal with unexpected expenses.

To do so, you will need to prepare:

• Sales forecast. This document shows your future sales (how many you will be making and when) and the revenue that you will generate over a certain period of time.
• Cash flow forecast. A cash flow forecast represents how much money will come in and come out of your business over a period of time.
• Potential risks. There is always a financial risk, especially when you’re just starting up. You need to identify those and prepare a plan on how you will cover any unexpected expenses

When it comes to preparing your financial plans, be honest with yourself and with your potential investors. They don’t want to see a start-up with millions of pounds of profit and no potential risks. They want to see real numbers and real risks as well as how you would deal with them.

Moreover, having precise figures will help you plan ahead and understand how much money you actually need from investors. Remember, it’s always best to ask for the least amount that you need!

Potential to grow

Another thing that investors want to see from you is that your business has the potential to grow.

Think about the future of your business. Where do you see it in, for example, the next three years?

Do you see your business expanding nationally or internationally? Are you thinking of introducing new products or services? Would you like to expand your team and move to the bigger premises?

It’s important to note that these aren’t your dreams. These are your goals, so you need to create a plan of action that explains how you’re going to achieve them. This can include your marketing strategy to promote your business, processes you will implement to ensure a smooth running of your business, pricing strategies that will help you stay competitive but make a profit at the same time, etc.

Investors want to be sure you’re planning ahead and your business will be able to adapt to any changes, growing competition and achieve more and more every year!

Investors want to know how you will use the invested money

If you’re looking for investment, you should have a clear plan of what you are going to do with the money you receive.

No one wants to give their money away without knowing how it will be spent.

Another reason investors want to know how you will spend their money is that it gives them an idea of when they can expect a return.

So before you start looking for investors that would help you start or grow your business in the early stages, prepare your business plan and sales and cash flow forecasts. This will help you identify the areas that need funding the most as well as the amount you need to take your business to the next level.

Once you know those things, you can easily create a detailed and justified plan that demonstrates where you will spend the investors’ money and how it will make a difference to your company.

Risk assessment

Every business has risks. And start-up businesses have even more!

While we have touched on the financial risks earlier, there are other things that can negatively affect your business. Some of the examples could be not being able to keep up with the competition, not enough leads converting into customers or even too many customers but not enough staff! There are also other risk factors that businesses have no control over, such as pandemics, financial crises or natural disasters.

When trying to convince potential investors that your start-up is worth investing in, you might be thinking that it’s best to keep any negatives including risks to yourself and present your business as it’s going to be a 100% success.

However, investors have experience in business and working with start-ups. They understand that risks are part of any business and if someone is trying to say that there are no risks that could affect their business, it sounds, well, suspicious.

There is nothing wrong with having those risks. All you have to do is come up with ideas on how you can minimise those risks and their negative effects. Being able to show that you thought through every scenario will help you build trust and prove that you take your business seriously.

And the reason why it’s so important to the investors is that every risk to your business is also a risk to them. If you can’t make enough sales or your business fails, the investors lose their money.