After talking to dozens of investors, venture funds and business angels in different countries, Katerina Voronova, co-founder and Marketing Director at InnMind.com, prepared an article on how investors themselves perceive the submitted projects, what criteria they use when selecting potentially interesting start-ups, and also — why so many projects do not get into the investor’s portfolio.
Speaking about investors, we must understand that this notion is very general — here we should distinguish between a private investor, a business angel, a venture or corporate investor, and others.
How do they all differ? Almost in everything. Here are a few basic parameters:
Interests: a private investor who primarily seeks to multiply his income, cannot be compared to a corporate investor at all. It is him who will first pay attention to the technology, and only after that he will evaluate the current profitability of the project. Sometimes corporate investors do not look at incomes at all, because they are interested in technology to integrate it into their product, they perceive it as an “addition” to their product.
Size of the investment: at the initial stages (pre-seed, seed) projects often address to business angels and serial entrepreneurs. On the next rounds of fundraising, they begin to communicate with incubators, venture companies and so-called super-angels (business angels who are willing to invest several times more than traditional business angels).
Involvement in the company management: sometimes some investors are ready to just invest their funds and wait for the results. But there is another approach that is radically different: investment with the right to manage, when the investor, even without a controlling stake, plays a significant role in the management of the company and has power in making key decisions.
Involvement of personal contacts: one of the “values” that investors can bring to the development of your project (and sometimes it can become a key value) is potential partners, suppliers and customers from their network. Everybody understands that getting financing is very cool, but getting potential customers is much better, because clients will help your business to get on its feet.
Note that these are just examples and common cases, there are no universal rules. There are venture funds that invest only in early stage projects, or private investors who are primarily interested in “social benefits” of the project, and therefore are already looking at financial indicators.
The startup sees itself as a super-mega-unique project that will make this world better, and also bring a huge profit to the founders, all investors and other people involved in the project.
There is a widespread stereotype that investors (especially venture funds) are kind of heartless machines analyzing the formal parameters and metrics of startups and based on the results of this analysis, investing into the most “packed” projects.
In fact, this is not true. Most investors in the process of startup evaluation follow exactly the same logic as any other entrepreneurs while selecting potential partners. For them, it is important that their visions coincide and it must be comfortable working together, they want to know the founders of the project in person and understand their motivation and personality and many other things that go beyond the numbers and metrics.
In order not to be unfounded, we at InnMind are conducting a special study Study of investors behaviour and decision making process, in which we communicate with dozens of investors around the world, studying their views and approaches to the evaluation and financing of start-ups. The results of the research will be published in October, but now I am are ready to share intermediate conclusions with readers.
If you have no time to read the whole article, here are the slides with the main points.
Follow the link to watch the slides: Why would the investor not like your startup?