Risk Vs. Reward: Startup Milestones Investors Are Looking For

Risk Vs. Reward: Startup Milestones Investors Are Looking For

Are you gearing up to collect or first – or another round of funding for your business? Do you fully understand what these folks expect from the businesses they front their money to?

There’s a lot that goes into building a business from the ground floor. Investors are wise to this fact and aren’t likely to be dazzled by energy and confidence alone. They want the hard facts – to know how you’re going to achieve certain milestones – and to hold you to those promises.

Startup founders meeting

Here’s a few specific milestones to keep in mind while planning your next meeting with investors:

Customer Traction

There are indeed a number of factors investors will use to determine customer traction related to your emerging product. After all, paying customers are a sign of good things to come. Not all products will have a market fit.

Customer Traction Indicators (CTIs):

  • Beta subscribers.
  • Pre-sales.
  • SALES!!!
  • Consumer reviews/recommendations.
  • Social weight.

When many of one or all of the above are present, you’re definitely boasting some serious CTIs that will inevitably attract investors. CTIs show investors a number of things:

  • You’ve carved a niche in the market.
  • Your monetization scheme is working.
  • Your team is capable (can execute).
  • Your product/service actually works.

In the absence of a product that’s actually making bank, it can be tricky (but not impossible) to attract investors. Unfortunately, for startups in the tech space, or any other industry where big money is needed to fully launch a product to market, cash is king and (hopefully) at this point, all that’s standing between your product and the market is loads of investor cash.

Here’s some ways to tip the scale in your favor when you don’t yet have physical sales to show off when you sit across from angels and VCs:

  1. You’ve shown customers a mockup or prototype of the product and they’re excited enough to sit with investors and tell them about their willingness to purchase.
  2. You’ve actually sent betas of your products out to customers and have promising feedback to share.
  3. Your product has tons of free users with high engagement rates, who’ve indicated a willingness to go to the next level with you.
  4. You’ve already pre-sold the product to a number of people willing to pay for it – and money is the only thing holding up production.
  5. Your business is based in a currently booming market and the product you have to offer will give hungry customers the type of improvements and/or value added services they’ve been craving (obviously heavy social proof is required here!)

In the scenario where physical sales haven’t been completed, it’s all about de-risking your startup for (very) risk-averse investors.

Discussing business strategy

Successful identification of risk (and a plan to combat it)

The last thing you want to do is sit across from a savvy startup investor and have them tell you the risks associated with your business. When this happens, most all will be immediately turned off by your idea, and are likely to view you as a bumbling, stumbling fool!

Risks come in many shapes and forms, depending on the business you’re in. It’s vital you come to the table not just knowing what they are, but to already have taken steps to mitigate them.

Risks startup founders should identify and ways to reduce their weight in investor’s eyes:

1. Balanced talent on the team

The balance of technical knowledge and business acumen is key for a strong valuation.

For instance, a software developer can make for a great founder of a tech company. If they’re not an experienced entrepreneur, they would mitigate risk by hiring or partnering with an experienced CEO with a great track record.

2. Market advantage

A market advantage such as the world’s first self driving taxi might give you a massive advantage in the marketplace. However, investors will only see risk.

Sure, they’ll sell like hotcakes at first due to the labor costs savings they might offer. But, will they work? Accidents, including death, and the lawsuits they bring don’t make for a solid investment without a near-perfect risk mitigation strategy.

3. Concept to profitability

In the previous section, the idea of turning a concept product in the beta testing stages was brought up. Social networks are among the many great examples of a strong and proven concept that works great as a free model, but gets sketchy for investors when it comes to seeing how they’ll turn a profit.

Facebook makes billions for its investors; Twitter has proved to be problematic at turning massive profits. Instagram makes great money for Facebook; then what about the rising Tik Tok?. How are you going to make beautiful diamonds out of raw coal for investors?

Identify all risks and don’t get caught with your pants down in that initial meeting with investors. The likelihood for a second chance at a first impression is very unlikely.

Developing business strategy for decision making using BI reports

Scaling the Business

Last is being able to articulate a scaling strategy. If you’ve made it to the stage where you’re looking for investor money, you’d better have a plan to scale, or you’ll be ousted from the meeting before you’re done your elevator pitch.

From a scaling standpoint, you need to identify individual investor preferences and look for a firm or private angel that can fit into your scaling plan:

  • Is the infrastructure and product orders in place to scale as soon as money is injected into the areas it’s needed?
  • At what point will more money be needed as the company continues to scale?
  • Will the scaling process be more long term, requiring patient investors who’re willing to work with you for 5, 10, 20 years or more?
  • How does the investor and their network fit into your plan – are they just the money people or do you need their skills, team, and contacts to scale successfully?

Determine clearly how the business will scale, step by step along the way to profits, and what you’ll need from investors to achieve those milestones.

Final Thoughts

Don’t consider one or two successful funding rounds as a sign the business (and you) have arrived. Today’s startup space is fast-changing and complacency often sets in when founders get too big for their britches.

From one round to the next, investors are going to become increasingly more demanding with their expectations and evermore hesitant to part with their cash – unless you have a smart game plan, are willing to listen, and know all the right things to say.

Ivan Widjaya

Ivan Widjaya is the Owner/Editor of Noobpreneur.com, as well as several other blogs. He is a business blogger, web publisher and content marketer for SMEs.