Not all startups are equally interesting to investors: much depends on the stage of development the project is at.
Which stages of startup development are most interesting and why? What goals need to be achieved to move on to the next stage of development?
According to CB Insights, the main reason for a startup’s demise is slow growth, when the company is unable to move on to a new round. The second reason is a lack of market demand for the product. To avoid failure, the team needs to understand what interests investors at each stage of a startup’s development.
The First Stage:
pre-seed. The startup is just developing its business model and looking for its product. The goal is to define the value proposition and find a relevant problem that the startup solves. There are already first customers and sales.
The first investors are often people from the 3F circle: friends, family, founder. Investment risks are highest at this stage, but so is the potential return. Investment amount: $100-200 thousand.
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Stage Two:
seed. The startup brings the product into line with market requirements (product-market fit). It is important to find a market with a sufficient number of potential customers.
At this stage, repeat sales appear, channels of interaction with customers are developed, and the business model is almost defined. It is important that customers understand the value of the product and want to stay with it. Investment volume: $1-5 million.
Rounds A and B. The startup has found a working business model, its viability is confirmed by sales, and the possibility of scaling the business is being tested.
The risk of loss for venture investors is reduced because there are clear sales channels, a product, and customers—the effectiveness of the business has been proven. That is why many prefer to invest in startups at this stage. The downside for investors is that competition is higher and the potential return is lower. Investment amount: $10-30 million.
What Do Investors Look For?
Try to honestly evaluate your startup and look at it through the eyes of an investor. As practice shows, at the pre-seed and seed stages, partners primarily pay attention to several significant factors. Try to apply them to your idea.
Team
Investors evaluate four criteria:
Entrepreneurial experience. Experience in creating and closing startups is taken into account.
Experience and expertise in the field in which the startup is developing.
Flexibility and trainability, the ability to adapt to a constantly changing environment and new realities.
Commitment and focus on the project. It is difficult to combine the full development of a startup with other activities. Therefore, it is important for investors that the core team is as committed as possible, both materially and immaterially: team members have invested their own money, left other projects, quit their old jobs, etc.
The average age of a successful startup founder is 38. This is not surprising: younger people do not always have the skills and experience to survive in the market.
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