5 Indicators that Early Stage Investors Want to See Before They Invest in a Deal

Written by Tom Walker@TechColumbus10 years ago

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Investing in startups is risky business. It’s really tough (okay, impossible) to predict exactly which companies will succeed and which won’t.

But there are certain milestones that savvy investors want to see.

They know that while these indicators don’t guarantee success, they can certainly improve the odds.

1. Customer Validation

   Investors listen to entrepreneurs who know what their customer’s problems are.

Entrepreneurs who talk directly with and listen to all levels of potential customers, from general managers who own P&Ls, to technical implementers, to actual end-users, are ahead of the game.

Whether it’s the nurse who will be relying on a new medical device, the warehouse foreman who needs a faster way to fill orders, or a security guard who needs to see in the dark, end-users’ problems and ideas will help you build products that your market wants to buy.

Beta customers, sales and other direct contact with the market are the best forms of validation.

2. Market Validation

   Where’s the evidence of a large, well-defined population of buyers for that great product or service you want to build?

What distribution channels (physical and sales) exist? What sorts of strategic partnerships will be required? Have you developed those relationships?

What are competitors doing or not doing that you can do better?

3. Investor Validation

   Who else (besides friends and family) has put money into your deal?

Has prior due diligence been completed? What were the findings? Are there other investors who have expressed an interest in syndication?

4. Entrepreneur’s Skin in the Game

   Is the entrepreneur full-time yet?

How has the entrepreneur invested in the business? Sweat equity is good. Cash is better.

5. Intellectual Property Protection

   Is the technology patented?

Does the startup own the rights to the technology or hold licensing agreements that preserve exclusivity? How great are the reverse engineering risks?

Seasoned investors invest in the entrepreneur every bit as much as the business plan. Most have a list of what they’re looking for:

• Entrepreneurs who are passionate and coachable
• Evidence that the entrepreneur knows the industry, customers, and technology
• Business founders with prior startup experience–even if they founded a company that failed
• Entrepreneurs with the confidence and balance to acknowledge they don’t know it all and ask for advice, and most of all
• A feeling that the entrepreneur is someone investors can work with over time.

The bottom line: Investors want founding teams who can listen and lead.

TechColumbus is a great place for startups to become investable. We help build and accelerate great companies by providing expert advice, access to capital and business growth connections. As both advisors and investors, we are uniquely qualified to help create the kinds of companies we (and our co-investors) want to add to our portfolios. Whether you are an entrepreneur with a great idea or the founder of an early stage company, contact us. We want to help you grow.