What is the magic formula that turns investor interest into action? In the last of our fundraising top tips blog series, we consider ‘the million dollar question’ of why investors back early stage businesses.
We have identified the top reasons based on the accumulated wisdom of startups who have successfully raised via AIN over the past two years, based on dozens of interviews. So exactly what are the top factors that will encourage an investor to become part of your cap table?
1. The strength of the founding team
This came out as the number one reason startups received backing. After all, at this early stage, often pre-revenue, traction may be limited. Investors are taking a gamble that any early stage company will go onto a significant exit and ensure a significant return. They need to have faith in the founding team to deliver. The old adage that ‘people buy people’ is proved out here.
According to Ben Hallett, CEO and co-founder of fast growing EdTech company Vygo: “Our first round of angels mostly invested in Vygo because they believed in the founders’ conviction around the mission and our horsepower to bring it into reality.”
This view was shared by Antony Yousefian, founder of innovative agtech businesses Bx Technologies: “ We are told it is our story and the experience of the team. We understand farming and the food chain deeply, the problems that exist including in agtech development. Bringing together data-science and experience from sectors including gaming, media and finance.”
According to Yang Li, Chief Growth Office, crypto firm Ziglu: “Ziglu has an experienced team with a proven track record of building amazing startups like Starling, Monzo, Wirex, Meituan.”
This view of the vital importance of the founding team was perhaps best summarised by Archie Wilkinson, Co-Founder of energy startup LifeSaver:
“Investors will invest in a great team with an ok idea over a great idea with an ok team, it is important to have people around you that make you feel like the weakest link!”
2. The market opportunity
As seasoned veterans backing a multitude of companies, angel investors are adept at very quickly identifying the opportunity. Ultimately their chance of making a decent return on their investment.
According to healthtech startup Occuity founder and CEO Dan Daly:
“We have a proprietary technology, protected by nine patents, and an expert team developing products which deliver clear solutions to large and growing markets. The opportunity is tremendous.”
According to StJohn Deakins, the founder of ‘Zero Data’ leader CitizenMe.
“We’re a cutting-edge Marketing Technology provider that is also driving significant social impact. It’s a great mix of a market-making enterprise with huge market potential, whilst also creating a brighter future for us all.”
According to Alex Christodoulakis, co-founder of DIY wealth-building app Wealthyhood:: “Our angel investors immediately acknowledged the gap between trading apps and robo advisors and the need for a DIY wealth building app for long-term investors.”
Investors will be drawn to the newsworthy, not just the why in terms of the problem you solve for, but the why now? Can investors see that your business is part of a rising trend that has real momentum? This of course needs to be a substantiated trend rather than a more short term fad.
According to Nick Begley of founder of Psychological Technologies (PSYT): “The popularisation of meditation, mental health destigmatisation, and the willingness of millennials and Gen Z to invest in their wellbeing, has led to the market exploding in recent years, giving rise to many 9 and 10 figure company valuations in the space.”
The importance of market timing in gaining the backing of angels was also stressed by Rav Roberts, CEO of UK Consumer & Business healthtech Pharma Sentinel: “Healthtech was very topical, even before Covid-19, with more people living longer & taking personal responsibility to manage their health to live quality lifestyles.”
Alongside the team, market opportunity and timing, investors will still need the evidence for take up to show this is an investable opportunity. Good old fashioned traction is still a key factor in why successful startups get funded.
According to Alex Christodoulakis : “We had already built some momentum, showcasing that we were heading in the right direction. We had more than 3,000 users signed up to our waiting list, over 10,000 followers in our LinkedIn and Instagram pages and had developed a community of 50 Wealthyhood Ambassadors across Europe.”
As well as actual users, other metrics can also cut through the ice with investors who need verification of success. PR and those all important product reviews are crucial.
According to Katie McCourt from sustainable underwear startup Pantee: “Within a short time of launching, we had grown an engaged community of over 10,000+ women, were racking up 5* reviews on Trustpilot and had been featured by the likes of Vogue, Stylist Magazine, Drapers, The Observer and named a ‘Top Sustainable Underwear Brand’ by The Independent.”
5. Personal understanding
The final reason on our list can provide the sprinkle of magic dust to turn consideration into definite action. This is the investor having a personal understanding or connection with the business. This perhaps underlies why we tend to see a disproportionate amount of funding into food and drink startups. Clearly this may be more difficult for B2B SAAS platforms who will need to make sure they really deliver on the other four factors.
According to co- founder and CEO of AI consumer technology business aisle 3:
“Investors understood the problems aisle 3 is trying to solve and they related to their own shopper journey – especially when I was able to walk them through the competitive landscape and how we had already exceeded the current incumbents. I think, as shoppers, we are too accepting of the status quo and the need to open multiple tabs on your browser even though hotels, car insurance or flights are easy to compare.”
Gary Piazzon founded digital travel companion Porter after becoming frustrated finding a suitable hotel. “All of our investors resonated with the problem we’re trying to solve. They’d all experienced the frustration and wasted time of endlessly searching for the right place to stay when going on holiday. This immediately put us in a good position when discussing the business.”
BorrowMyDoggy founder and CEO Rikke Rosenlund also agreed the ability to empathise was paramount. “It is also helped that many investors are dog lovers. They could ‘get it’ instinctively and understand it would be great to have something looking after their dog.”
So in summary, the top five reasons investors back startups are: The strength of the founding team, clearly defined market opportunity, timing, evidence of traction and personal connection with the service or product.
Good luck with your fundraise and keep those five factors in mind when preparing your pitch!