One of the most crucial questions to ask yourself when you’re looking into getting funding is whether or not your startup can be invested in.
Some startups will never have an opportunity for investors, but there are others that might just need one little spark from somewhere and they’ll take off like wildfire!
Let’s find out what makes these types of businesses investable so we know if ours has any chance against them or else turn away those finance gods before it becomes too late.
I’ve compiled this list of must-haves that will help your startup succeed in raising funds and making an impression with potential investors.
Here are the 4 requirements a startup must have:
#1 Be Scalable
Do you have what it takes for your business to scale?
To be successful, all businesses must scale. However, not every business will be able to scale up or scale out as easily as others.
You really need something that can be sold many times. The investment is usually there to build something that you can keep selling many times over and over.
Let’s say you do consulting. You’re consulting by the hour and charging by the hour. Even if you work really hard there are still only 24 hours in a day. That is by definition not scalable.
On the other hand, there is a computer game like Subway Surfers. They build the game ones, but users can keep downloading it at little or no extra cost per download. Subway Surfers now has more than 2 billion downloads, there is infinite scale. They can keep selling without any real extra cost.
So scalability is building something that can be sold again and again. Like a piece of software or some kind of service and sell it a million times, but with very little extra cost for every unit sold.
Being scalable is a requirement for getting an investment off the ground.
It’s also a requirement for growing that investment successfully.
Scalability is not the same as growth. Growth is generally good. Scalability is good if what you are scaling is growing at an acceptable rate. If you are scaling a business that is losing money or has very little profit potential, then you have not achieved scalability. You have achieved growth at any cost.
#2 Be Protectable (Unfair Advantage)
So now your company is scalable, but it is of little value unless you can protect it!
If anyone can copy it in 2 days they will do that and compete against you on an even playing field. Any startup needs some kind of unfair advantage that cannot be simply copied by competitors.
If an investor invests $1 Million dollars in a startup, she needs to know that somebody else can’t just copy whatever has been built easily.
This is sometimes referred to as an unfair advantage. What is unique about your company is that gives the company an unfair advantage as well as being hard to copy. You will need this in order to be investable.
Let’s run through a few examples of things that can protect the unfair advantage of a startup:
Spending months and maybe years to build a unique software product is protectable and can certainly be an unfair advantage.
However, in the long run, it will almost always work out better for you because…
The competition will catch up! Don’t get me wrong. I’m not saying your product won’t be successful.
The only thing I’m saying is if you don’t keep moving forward, someone is going to come along and… Take Your Thunder!
Why all this ranting and raving? Simply this: You should never let yourself get “stuck” in a development cycle. Always push forward with your good ideas.
For startups, the software is probably the most common protectable asset. This is what a lot of startups do build amazing software that can be anything from games to cloud-based services.
Can’t be something that can be copied quickly then it just isn’t protectable. Yes, it is great that you spent 4 years building this. It means that it will probably take the completion at least 2 years to copy it.
Patents are obviously protection in themselves, but they can be hard to get, time-consuming, and expensive to get. Also in a lot of businesses, it just isn’t applicable.
In software, patents are not widely used amongst Startups. This is mainly because:
#1 It takes a long time to get a patent, and
#2 Even after you get one, it takes a long time to actually enforce it.
It is almost impossible to obtain a trade secret when it comes to protecting your business. In certain countries, these secrets cannot be obtained at all.
Data that no one else has access to can be an incredible asset.
At Vivino, we’ve spent 8 years building the world’s best database of wine. On top of that, we have 30 million users that help us improve and update that database.
This gives Vivino a significant edge and is a very protectable tactic, which is clearly putting them at an unfair advantage.
Although early-stage startups rarely have brands that are protectable and valuable, it is not unheard of for them to do so if they take advantage of a branding opportunity. In some cases, this can come as a huge advantage over the competition as it may provide them with a competitive edge.
Network of users
A network of users or network effects can be highly protectable. When GitHub sold for 7.5 billion it wasn’t because they had built protection that was much better than the competitors. I’m sure that some of the competitors had good products too.
However, Github had become that standard and nobody had the network of users that GitHub had. This is a highly protectable and very unfair advantage.
We now come to the third requirement a startup must-have.
#3 Healthy Cap Table
When it comes to your cap table, there are a few things you need to avoid.
As founders, we make a lot of mistakes, and is ok. Stuff happens and things go wrong. However, there are certain things we cannot mess up.
Messing up the ownership of shares in any way is never an option, and failure on this front can have drastic consequences for investors or employees who put money into company stock at early stages.
The integrity of every startup depends on knowing what’s going on- especially if there is ever any question about how much each person owns.
Unlike a lot of other relationships, investment is like a marriage. It is for life and just like in real life divorce is very hard and very painful.
In some cases, it is impossible to get rid of an investor again. So whenever you invite an investor on board make sure it is someone you can work with for a long time. It may not be someone you can get rid of again – ever!
The other big thing that can destroy a cap table is selling too much of the company too early.
If founders have less than 50% of the company before an A-round. Then it is likely that the company is uninvestable. Any good investor knows that the founder or founders need to have meaningful stakes in the company AND there has to be room for future investment rounds.
I get it you want this investor on board and you really need the money, but if the investor wants 40% of the company she probably is a bad investor anyway, doesn’t know that this can really hurt the future of the company. So stay away from that investor.
My general advice is to give between 10-30% of the company in any funding round preferably below 20%, but go all the way to 30% if that is what it takes.
Creating a strong cap table by raising capital through equity financing rounds helps assure investors know what’s coming next when they invest in your startup.
#4 Be a Full-Time Founder
Are you a full-time founder?
If you’re not going full-time on your startup, then don’t expect anyone to invest in it.
Investors need to know that they get the flesh and blood of the founders. They can’t just be investing in an idea or a concept anymore. The investors want to see that you are dedicated and committed to this venture from start to finish.
So if you aren’t ready for this commitment yet, then maybe now isn’t the right time for your startup after all.
You have a great idea but no one is going to believe in it unless they see how much work and dedication goes into making it happen every day of every week of every month until its completion.
This is what will make them feel confident about their investment because they know that there’s someone who has put their heart and soul into making this business succeed with everything they’ve got!
And when people do give money away, we want them to feel like it was worth giving up! We want them happy with their decision so we’re willing to go above and beyond expectations!
So, there you have it!
If you have those 4 things covered, well then you won’t be disqualified in the first round. If you’re working towards building a startup that you want funding at some point try and avoid these traps.
There are a lot of startups out there and it’s hard to tell which ones have potential.
Most investors don’t want to waste their time on companies that will never be successful, but they also don’t want to miss the next big thing.
The 4 Startup must-haves I’ve shared with you in this article should be at least considered before approaching any investor so that both parties leave feeling satisfied.
The fundamentals of making a startup investable are to ensure that it can scale, is protectable, has a healthy cap table and the entrepreneur is fully committed.
If you haven’t asked these four questions before approaching an investor about your business idea, make sure you do so first.
I have been in this business for several years now and have seen thousands of startups. And there is one thing that always holds true, no matter how good your product or service is.
If you break these rules you won’t get an investment no matter how good your startup is
So if you don’t want to miss out on funding, make sure not to break these rules!