It is a fair question to ask what investors look for in an investment opportunity. The answer is that every investor is different, and each has their own set of criteria. Some decide purely on the facts; others like to factor their feelings for people. Some take more considerable risks where others are playing it safe. But, there are certain across-the-board factors investors will take into account when evaluating opportunities. So, before approaching investors with your pitch, entrepreneurs need to cover all of these bases.
In this article, I would like to share a few thoughts on what specific criteria investors will use to evaluate your opportunity without getting too much into technical details.
The capital or Return of Investment
The most important factor for investors is capital. Every company is unique, and capital allocation considerations are no exception. The two most important considerations are: Your company’s business model and how this model can generate returns for investors. Investors look for companies that can create economic value and return capital to them. These types of companies can be growth- or value-driven, operating in a sector that offers an above-average rate of return. For example, in the real estate industry, entrepreneurs want to make money from the value of their land. More specifically, investors want to see that the risk and return are aligned for the investors. This may mean that if they can sell the property for a higher price than they invested, it’s a good investment.
Do you have a competitive advantage?
What makes your company unique? In other words, what makes your product different than your competition? Will this competitive advantage be enough to justify the investor’s expected return? The difference between a business opportunity that you can afford to lose and one that you can’t afford to lose can be simply summarized as follows: “Are you competing against just yourself or the entire industry?”
Many entrepreneurs get so caught up in creating a solution that solves a specific problem, they fail to see the bigger picture and how their solution compares against their competitors. The solution they create won’t be the only one that will solve the problem. The bigger question, however, is: Do you have an advantage? How is your product or service different from others who are already on the market?
Do you have a sustainable competitive advantage?
By establishing a sustainable competitive advantage, a company has a solid basis from which to compete, grow, and exit. That competitive advantage could be defined as the core competencies required to sustain a company’s business in the long run. As the saying goes, “how you differentiate yourself from others is usually how you differentiate yourself from yourself.” Now, we’re not saying you should be doing something that does not help you sustain your business. Still, one of the more common reasons investors pass on a company is that they don’t see any differentiation.
It is repeating that if there is no differentiation, there is no way for your company to differentiate itself from competitors.