What Investors look for when Investing in Startups

What Investors Look For

You really have to look at just the basic stuff when investing in startups.  Although your technology might be super neat and your service is super awesome, what makes businesses good are usually just the use of very basic good solid fundamentals.  So start with your product or your service.  Is it new?  Is it cool?  Does it have something that is differentiating that will grab an investors attention?  Will they grab the consumers attention?  You have to have something new or different or have such a clarity in your local market at least, so you can dominate at least locally.

Are You Profitable?

Most importantly when you build your business plan, you have to be profitable.  If investors are going to take you seriously they are going to look at how you build your numbers.  For those of us that have done it awhile, we can usually smell B.S. a half a mile away.  So if you are trying to have a contrived business model just for the investor, don’t do it.  You are not doing them any favors and you have not helped yourself.

Who is on Your Team?

The most important thing that we would be looking for is people.  You might have a really cool technology, you might have a super awesome service, but it really is in the execution.  Your idea probably isn’t the coolest idea, and there are other people that have thought about your business and you might have a different angle on it.  Maybe you see things a little bit differently, but it is going to be mostly how you actually build the business.  How you execute your plan.  Therefore it is all about people.  Just because you are the smartest guy in the room, that doesn’t mean you are going to be the best at that job.  It needs to be the right person with the right skill set, the right temperament.  Just because you are a great technologist doesn’t mean you can be a great CEO.

Investors that want to make a quick buck by flipping your company that they don’t really care about whether or not you are a good person or a bad person.  But if the investor is actually interested as a serious investor, their reputation is important therefore people that we deal with are important.  Are you ethical? Are you a good person?  Also what they look for is who you have around you, do you have the right people on your team?  Not only in the company but also outside the company.

Who are your Strategic Partners?

Do they have the right strategic partnerships?  Can you at least get out the door and hopefully the investor can help expand beyond that but in the beginning can you at least step outside of your immediate circle.  Obviously, the business has to be able to grow.  Is it scaleable, is it efficient, how much money do you need to actually spend to get to a $10 million revenue line?  If you need to spend $50 million to get to a $10 million revenue line and burning about $20 million that is obviously not going to cut it.

The Right Match

The last question would be if we are compatible.  Are we as investors and as entrepreneurs, are we compatible.  Do we see the world in the same way, do we have the same horizon.  This is where the due diligence process comes in.  A lot of companies approach this in a different way, but it largely breaks into three segments.  I will start with the easiest which is your basic legal and financial.  Do you have the proper documentation?  Are you legally properly structured?  Is your accounting system good?  Are these basic building blocks of the company all there?  That is the no-brainer.  This needs to be taken care of before approaching any investors.

What Makes You Disruptive?

If you are approaching an investor such as myself who is focusing on a specific sector there needs to be something that is disruptive.  Is there something that not only will get my attention but other investors as well as consumers.  Also, does the company have the potential for growth?  If you just want to be a Korean company that is cool but most investors that I talk to are usually into bigger models.  Especially international investors, like myself, we want to see the international expansion potential.

For the commercial side of it, I focus on the team and the people that are in the management and also how you deal with HR issues, how you actually staff up, what kind of people do you have.  These people do not have to be your Stanford Grads or Seoul National Grads.  It just has to be the right people with the right attitude and in a startup environment, especially if you got a small team, that is so important.  That usually makes or breaks companies, the team that you have.  Make sure you have an answer for the competitive landscape.  Make sure you let your investors know your competition.

What Kind of Investment Are You Looking For?

There are different types of investments.  There is the early stage where it is somewhat of a crapshoot.  You are actually at the very beginning stages of the technology, you might not even have your beta product yet.  I try to stay away from them as of late because there are so many competing technologies that it is actually very difficult to identify companies that actually at the seed stage that can outdo all the other companies that are doing something similar.

Then there is your series A/B, these are your middle stage companies.  These companies have developed their product and they are now doing decent revenue, $1-3 million a year, and they are showing they have costs that are shrinking and these are the companies that my firm will be looking at.

The third one would be the later stage companies, these are your series B/C where you are looking to expand your local market.

Can You Go Global?

So we need to ask ourselves if we as investors can help these companies expand internationally into markets like the U.S., U.K, or China for example.  Often times this is where most companies get stuck.  They have done well enough in the local market but to get to that next stage, you can’t just go to conferences and meet up with different companies, because from my experience I have not seen them bear much fruit.  Joint ventures usually don’t work.  Actually, most joint ventures don’t work.  So when you are about to do something international you want investors that have had experience overseas and also has a broad network overseas that can help you expand beyond your local market.

Can You Exit?

The last stage is, of course, the most important stage and that is your exit.  For both the entrepreneur and the investor, you can say that you love your product and you love your company and you will never sell a single share.  If I see entrepreneurs that are that determined not to sell, that worries me a little bit.  That shows me that you are naive because, in the end, you do need to earn a living.  Making money as far as from the investor’s view has to be a part of the equation.  Also, it can’t be just the investors making money, you as an entrepreneur need to be successful.  That is also a part of the marketing, that this person who founded this company did so well that he sold 10% for x.  Those are the stories we want to build together.

David Kim
David Kim

David Kim, after several years of pioneering in the Internet and technology space in the US and throughout Asia, currently serves as the Chairman of Animoca Corporation, one of the largest mobile app developer and publisher in the world with its affiliate listed in Australia (ASX:AB1). Concurrently, he manages and oversees several financing and advisory projects ranging from private equity investments to refinancing of distressed assets. He is the Managing Partner at NP Equity Partners.

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