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Shooii Collapse Lessons, 12 Key Things Investors Look For In Internet Start-ups: Finance
12 key things investors look for in web start-ups
By Oliver Milman
The fall of online retail business Shooii into administration this week is a further sobering reminder to entrepreneurs of the importance of cashflow.
Despite only operating for three months, Shooii ground to a halt through a lack of cash, with the failure to land a “cornerstone investor” cited as a key reason for its collapse.
When starting a web-based business, you should be able to keep costs to a minimum – overheads are generally low and it’s possible to scale quickly without a huge investment in equipment, premises and staff.
However, if you aren’t yet making sales or you have lofty ambitions for your business, you’ll probably need an investor who will share your vision and back your venture with enough cash to keep it going.
Happily, increasing numbers of Australian start-ups are getting the seed funding they need through the explosion in accelerators and incubators, even if some have had to venture overseas in order to get backed.
But convincing an investor to part with their money based on little more than your business plan and experience remains a significant challenge.
To help maximise your chances, Andrew Birt, co-founder of Melbourne-based tech accelerator AngelCube, has put together the 12 essential steps for impressing tech-minded investors.
To see each of Birt’s tips, click on the tabs below:
1. A well-rounded team
Building a start-up is a long and lonely journey and the data shows start-ups with two to three co-founders are far more likely to succeed than single founder start-ups. Investors realise this and are much less likely to back ideas run by a single founder.
The Startup Genome Report, an in-depth analysis of 650 start-ups, found that well-rounded teams with a blend of business and tech co-founders stand a far greater chance of succeeding.
Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9 times more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.
The lesson? Before building anything, build your team and make sure there’s a blend of tech, marketing and sales skills within your team.
2. A clear market gap
While there are exceptions to this rule (e.g. Twitter), you need to fill a market gap for your start-up to succeed.
You need to solve a real problem and the incumbents you’re competing against need to be lousy, slow or unfocused.
For example, Xero.com didn’t invent accounting software – they just realised existing software sucked.
They innovated, took accounting software to the cloud and made it look nicer and easier to use.
The incumbents (MYOB, Quicken, etc) were incredibly slow to respond and Xero ate marketshare, got funded and scaled. They’re now a publicly traded company on the NZX.
The incumbents opened this gap by being lousy.
Gaps also emerge when consumer sentiment changes, when new technology emerges, or when a new model educates the market (e.g. Groupon rising to prominence in the US paved the way for an army of local imitators).
If you can tell the investor a story about the gap in your market and how it emerged, you’ll capture their attention.
3. Timing is everything
Timing is everything for web start-ups. It's so much easier to succeed in an emerging market, than a saturated, mature and stable market.
If we look at group buying again as an example, Australian start-ups like Spreets, Scoopon, Crowdmass and JumpOnIt all capitalised on the hype created by Groupon in the US.
While savvy people now question the deals model, most of these start-ups have already had an exit or major liquidity event.
If you tell an investor you’re launching a daily deals site today, unless it’s very niche, they’ll laugh.
They know the market is saturated, the competition is intense, and the barriers to entry are zero. It’s time to get out, not into, this market.
The good news is there’s always a new “hot market”.
For example, Airbnb’s rise to prominence and a $112 million investment has sparked a wave of interest in "collaborative consumption" and start-ups such as TaskRabbit.com, Vayable.com, SkillShare.com, ZipCar.com could all be localised here.
Also, as with the Xero.com example, enterprise software is still an attractive market.
The incumbent in many software niches is often outdated, shrink-wrapped software, making them prime candidates for disruption.
Gamification sparks the interest of people too – social games, marketplaces, the list goes on.
The point is start-ups that target emerging markets are far more likely to be taken seriously by investors. Find these markets.
4. A cool one sentence pitch
Simple is marketable. If you can't explain your start-up in a sentence, chances are it's too complex and investors will be just as turned off as customers.
Here are two simple formulas that help you clarify and refine your offer.
Option 1: [Start-up name] is the [well-known start-up] of [insert industry]
Example: [Drive My Car Rentals] is the [AirBNB] of [Car Sharing]
Option 2: [Startup name] makes [Task] [Benefit] for [Insert Target Market] by [Doing]
Example: [Freelancer.com] makes [Outsourcing Work Overseas][Easier] for [Small Business Owners] by [Offering Crowd Sourced Marketplace of Services].
5. Minimum viable product
If you can’t demonstrate a product, you’re wasting everyone’s time.
Investors don’t want to hear about a “game-changing” technology that you’re working on, or will build as soon as you’re funded.
They want to see a real product, something tangible they can play with, and with feedback from real customers that validates you’re solving a real problem.
MVP doesn’t mean building a minimum product; it’s a strategy and process directed toward making and selling a product to customers.
If investors can see you have a strategy for improving your product, adapting to feedback and, most importantly, acquiring customers, they’ll take you seriously.
6. Reachable customers
The first thing I always think about whenever I hear a start-up idea is how to reach the customers.
The best start-ups can reach customers via:
If your start-up can’t take advantage of any of these channels, e.g. there’s not a lot of search traffic, or your product doesn’t appeal to a particular community, then acquiring customers is expensive.
Direct sales can be an option, particularly for enterprise products, but cost of acquisition can be very high – good salespeople aren’t cheap!
The best way to demonstrate reachable customers is via search traffic.
If the keyword tool indicates there’s a tonne of people searching for keywords relevant to your product you could have a real business.
For example, Mint.com used heavily trafficked (search) terms like “personal finance software” to generate trials. They also targeted personal finance bloggers (community) and had a very high peer-recommendation and referral rate (social).
7. Lifetime value of the customer
Investors want to know the economics of one customer. For example, how does one user result in revenue for your start-up?
Or if it’s a freemium product, what percentage of users converts to a pay model?
SaaS (Software as a service) investors will want to know what percentage will leave your service every month. Also, how long do you expect the average customer to stick with your service?
If you’re building a marketplace, investors will want to know what the average transaction is (or likely to be), what percentage you take, what are the average transaction costs (transaction fees, maybe shipping) and how many transactions each customer is likely to make per annum.
Whatever the business model is, you need to be able to explain what your revenue drivers are to investors and describe how at even a small scale the product makes money.
8. Domain expertise
Investors love teams that are building a product where they have real-world experience.
For example, SmartOrders.com.au, a start-up I work with, is building a stock-ordering and stock-take application for cafe owners.
The founder also owns two cafes and so instantly knows all the problems associated with the supply chain, ordering and stocktaking process.
This domain expertise is invaluable.
If your start-up is pointed at an industry you don’t know enough about, throw yourself in the deep end and take volunteer or part-time work to wrap your head around the issues people face within that industry.
Otherwise, you will be guessing, and making inroads into the market will be hard work.
9. Ability to make friends, fast
Your ability to get customers, form partnerships, get PR, attract staff and attract investors ALL depends on your ability to make friends and influence people.
Too many start-up founders try to sell, sell, sell – desperately spruiking their idea to anyone who’ll stand still long enough.
This approach is really off-putting and results in the opposite of what you’re trying to achieve – making valuable connections that can help you grow the business.
There’s no secret, people will go out of their way help people they like and avoid people they don’t like. Be the person they like. Make friends.
10. Humility not hubris
This point quickly follows the last, but the importance of humility can’t be overstated.
The single most off-putting thing for an investor is a cocky entrepreneur who knows everything, has all the answers, and won’t take feedback or advice on board.
An investor can’t afford to back someone like that, because basically it makes life difficult.
So, as a start-up founder, make friends and avoid being a know-it-all.
Even if you are an absolute rock-star, which you could well be, be humble enough to take advice and listen to people trying to help.
11. Abundance mentality
Building a company is hard work and, yes, you’ve put blood, sweat and tears into it, but don’t make the mistake of thinking this entitles you to sell a small percentage of the company for $1 million.
Unless you’re doing (very) good revenue numbers and want to bootstrap the company long term (which isn’t a bad thing!), don’t expect huge valuations at round one.
If you have a direct inroad to the US market via an accelerator like 500 Startups or TechStars you may get higher valuations, but if you intend to base your start-up here be prepared to be more flexible.
While you may get a higher valuation from unsophisticated investors, remember that start-ups make their money on their exit, not on their seed round.
Many start-ups get offered an investment, but then hold-off waiting for a better offer. The problem with this approach is the opportunity cost is massive.
You risk missing your window of opportunity to build a big company while you wait for a seed round. Remember, timing is everything.
12. A tiny bit of traction
This piece of advice probably trumps all else. Investors want to see that real customers, with real money are using your product.
Often a start-up ticks all the boxes described above, but doesn’t have enough traction to get the investor excited.
You don’t necessarily need 1,000 customers, and quite often 30 to 50 will be enough for a B2B service, but the more time you can spend on building your customer base, testimonials and press, the better.
Don’t be disheartened when investors say they want to see more traction, just keep plugging away and building momentum.
If you can’t get traction, then revisit your project. Interview potential customers and consider ditching the project altogether.
There’s no shame in shutting down a start-up and shifting focus to a bigger opportunity in a better market.
There’s no shortage of ideas, but there’s a real shortages of right teams, with the right product at the right time.
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