7 Things Investors Look for in Early Stage Startups

7 Things Investors Look For In Early-Stage Startups

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What is one thing you look for in promising early-stage companies?

To help educate founders about the fundraising process, we asked investors about what they look for in early-stage startups. From adding relevant content to using free tools to recreate appealing visuals, here are several tips that help your content appear in Google Spaces.

Below are seven things investors look for in early-stage startups: 

  • Founder-Market Fit
  • Timing and Bad Ideas
  • Mission-driven entrepreneurs
  • A Plan and Ability To Improvise
  • Monthly Recurring Revenue
  • Founder / Founding Team
  • Predictable Metrics

Founder-Market Fit

When I was at Techstars helping with company selection for our accelerator programs we would always say “Team, Team, Team, Market, Progress, Idea” – I still think in those terms today when I’m assessing promising early-stage companies for Next Frontier Capital. 

The “who” and the “market” matter more than the “what” for us; we call this Founder-Market fit. 

We’re looking for a founder that has an interesting founding story – I love to learn why the founder has chosen to work on a particular idea and what unique insight they have into the market. We love meeting founders early and investing in founding teams with long-standing NFC relationships. And when assessing markets, I want to see a market that’s big enough to create venture-class returns and that’s producing some good in the world.

Kirsten Suddath, General Partner, Next Frontier Capital 

Timing and Bad Ideas

The longer I do venture, the more I realize there are no bad ideas…only bad timing. What seems crazy or nonsensical today may become the norm tomorrow. 

What we look for is someone with an earned founder secret. 

A founder who has lived a problem or who is thoroughly set on solving a customer pain. Often the ideas look bad or a market looks small because the world can’t yet see the foundational changes that are happening under the surface. Even after that, not all startups work because you have to hit the timing too. Having built the right thing and being able to be in a position to solve the pain as the wave comes.

John Mayfield, Partner, Album

Mission-driven entrepreneurs

I need to know that you are solving a large, urgent and valuable problem. I need to know that you are intent on building a durable, meaningful company. I need to know that you are using technology to create substantive change, unleash new markets and transform industries. I need to know that you’re mission-driven.

Ruminder (Romi) Dhillon, CEO, Sonoran Founders Fund

A Plan and Ability To Improvise

I am partial to early stage companies that have a monthly financial plan that defines new customers, retained customers, revenue, gross profit and expense by month for 12-18 months, so they have a guidepost of how they expect to perform. 

Most strategic planning for early-stage companies is focused on traction and the only way to get traction is to have a report card of your expectations. 

I strongly advocate “sandbagging” a sales term that means selecting the lowest amount of revenue and the highest expenses that you can forecast (and still show growth) so you set reasonable expectations, rather than forecast for perfection. 

By the way, the plan rarely rolls out the way you would expect it too, therefore the improvisation component.

Dan Tyre, CEO, Tyre Angel

Monthly Recurring Revenue

My experience working with Lighter Capital is more unique than other traditional VC investors. We are not as focused on finding a small handful of companies that we believe will be unicorns and hoping for an incredible multiple of a return on our investments. What we do is offer a completely non-dilutive funding structure with no warrants, financial covenants, or personal guarantees. 

Because this is a fairly unsecured debt facility we look to underwrite towards credit fundamentals of a company’s revenue history, ultimately lending 3-6X the company’s monthly recurring revenue up to 3M. 

What we do is analyze the companies churn, runway, customer concentration, and growth just to name a few of the fundamentals. 

Out of the 450+ companies we’ve financed nearly half of them have grown to successful venture rounds or acquisitions. So in essence, focusing on these fundamentals of creating a sustainable business ultimately benefits the investor and the company itself.

Tanner Kovacevich, Investment Director, Lighter Capital

Founder / Founding Team

One thing that I look for in a promising early-stage company is the founder and founding team. From my observation, successful startups have leaders that are fearless and have the vision to take the calculated risks necessary to position a company for success in its industry vertical.

Mark Paratore, Vice President, Business Development, GPEC

Predictable Metrics

Companies that have a proven business model should be able to understand their revenue metrics. Cost to acquire and the payback time on the acquisition of customer/revenue. How long do you keep a customer, and what does the revenue from that customer look like over time? This is really the best way to understand if you have a great product or just a great sales team. Great sales teams are important, but you have to have a great product as well.

Isaac Bunney, Chief Investment Officer, RevTek Capital