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What Startup Investors Look For In First-time Founders and The Red Flags They Avoid

Jonah Midanik
Apr 6, 2023
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min read

Starting a business can be a daunting task, especially in this fundraising environment and for first-time founders. If you're seeking funding, you may wonder what early-stage investors are looking for in a startup. What qualities do they seek in a founder, and what are the red flags they avoid?

In the world of startup investing, there are a lot of unknowns. Investors have to make quick decisions based on limited information, and they need to be confident that the companies they back will succeed. This means that they have a keen eye for spotting potential, but they also know what to avoid.

If you're a first-time founder looking for funding, it's important to understand what investors are looking for. By knowing what they want, you can position yourself and your company in the best possible light in investor meetings. In this article, we'll explore the qualities that startup investors seek in founders, as well as the red flags they avoid. With this knowledge, you'll be better equipped to pitch your business and secure the funding you need to succeed.

Keys Areas Startup Pre-seed and Seed Investors Look For In Founders

Investors focus on the founder -- the person leading the project -- not just the product itself. Your experience as a startup founder, the soft skills you possess, and your track record are crucial for a successful fundraising round.

Investors must familiarize themselves with the person seeking funding to ensure a secure investment. Building trust is crucial, as investors need assurance that the individual can achieve their goals and provide a profitable outcome. Below are the main areas that early-stage investors must see to instill trust and confidence in your startup:

  • Vision
  • Character
  • Qualifications and Track Record
  • Core Competencies
  • Confidence
  • Coach-ability

Vision

Your concept is the vision of how you want the world to be.

A clear vision guides the founder in steering their company toward its goal and motivates the team to work together. Your vision needs to be a good mix of ambitions and realism. Aim for the "big hairy audacious goal" while still being realistic. Think big and think out of the box.

Checking out other companies that have made it big with a similar idea can make the vision feel more reachable. Bottom line: a founder's strong vision is the backbone of their company's success, and it's what shapes the world they want to see.

Character

"People don't buy what you do; they buy why you do it and what you do simply proves what you believe." - Simon Sinek

Your "Why" is the driving force behind your idea. It is the real reason you're doing this, what motivates you, and why you are on this path in the first place.

Investors are more likely to invest in a startup if they understand the purpose behind it and can trust the founder's capabilities. Without a clear reason for creating the startup and a trustworthy founder, investors may opt to look elsewhere.

Additionally, the investors are not only offering financial support but also their time and knowledge. Their goal is to establish a sustainable business partnership with you and utilize their resources to benefit the venture. However, if they have doubts about your credibility or reliability, they may choose not to proceed with the investment.

Investors may inquire about your character in order to assess your potential as a business partner, and competence in your field.

Qualifications and Track Record

Research shows that there is a higher likelihood of successful serial entrepreneurs replicating past success, as evidenced by nearly 80% of startup unicorns having at least one co-founder with prior company experience.

First-time founders often face an uphill battle when it comes to gaining the trust of investors, and that's where qualifications and track record can make all the difference. Having a solid education, relevant work experience, domain expertise, or even some exposure to the startup world as a founder or early employee can be a major confidence booster for potential investors. These factors show that the founder has the skills, knowledge, and resilience needed to navigate the challenges of starting a business. Investors are more likely to put their money behind someone who has a proven history of success and a strong foundation in the industry. In short, showcasing qualifications and a solid track record are key for first-time founders to demonstrate their credibility and secure the much-needed support of investors.

Core Competencies of the Team

Investors need to see that the team is not only skilled and experienced but also uniquely qualified to tackle the problem at hand. By highlighting the team's diverse strengths, founders can demonstrate how each member complements the others, creating a well-rounded and capable group that can overcome challenges and adapt to the ever-changing business landscape.

It's essential for founders to emphasize why their team is the best fit for solving the specific problem their startup aims to address. This could include unique domain expertise, specialized technical skills, or even personal experiences that give the team members an intimate understanding of the issue. By showcasing these core competencies, founders can convince investors that their team is the one that can turn an innovative idea into a successful venture, setting them apart from the competition and instilling confidence in their ability to deliver results.

Confidence (read: Not Arrogance)

When founding a startup, it is important to have confidence in yourself, your idea, and your team to overcome challenges. It is common to receive rejections from investors, clients, banks, and even loved ones. It's important to develop a thick skin and self-confidence to overcome obstacles.

Coach-ability

Are you a good listener? Can you learn quickly and effectively? These are two factors essential for investors. A good investor will want to nurture a mentor-mentee relationship with you. A receptive mind is a vital quality that you will need.

The Red Flags & Dealbreakers for Investors

There are seven red flags that will leave you without a pre-seed or seed investor and could potentially harm your reputation. Here they are and how you can avoid them:

1. Dishonesty

Lies inevitably backfire. Investors will do their due diligence and look closely at a team’s background and track record. If any red flags arise, it could jeopardize their chances of getting the funding they are seeking. When meeting with potential investors, it is important to present yourself and your company in an honest light.

2. Underestimating the Competition

Regardless of how innovative your product is, you will never not have competitors. Every innovation either disrupts an existing market or creates a new market that will quickly fill with other products. Competition will always exist. What investors care about is how you are differentiated from your competition.

3. Overstating the Addressable Market

Overstating the size of their addressable market is a great way to show investors that you don't understand sales. Startups need to realistically assess the potential market opportunities and customer base they could reach and not overestimate the ability to capture market share.

Instead of talking about the Total Addressable Market (TAM) talk about your specific customer segment opportunity. Specifically who the target customers are, how big the customer base is, how many customers you need, how much you will spend to get them, and how long it will take for you to get to that number.

4. Unreliability

Timely fulfillment of commitments builds trust and respect among business partners and potential investors. Showing that your team can be relied upon to deliver on promises showcases reliability and accountability that can exude credibility and help create strong relationships for future business opportunities as well. Taking too long to meet expectations or fulfill commitments is not only unprofessional but also does not inspire confidence in potential investing partners, making it difficult for them to see the worth of your company or product.

5. Being Desperate

As an early-stage startup, you are undeniably eager to raise capital and secure funding. Don't let that eagerness translate to desperation. Being desperate sets up unrealistic expectations for the other party, such as expecting them to make decisions quickly without properly considering their own interests. This is not only impractical but can lead to hasty decisions with less-than-ideal outcomes. A little bit of patience and an assurance of trust can go a long way in solidifying any future partnership or investment opportunities even before they’ve begun.

6. Being Arrogant or Defensive

Being arrogant or defensive is one of the most off-putting traits a person can have. A person with an inflated sense of self-worth, who overstates their capabilities and takes unnecessary pride in either themselves or their work can come off as unapproachable and closed off. It not only shows a lack of humility but it indicates a certain immaturity as if the person feels they always need to be right and superior.

7. An Unwillingness to Listen

As a business founder, it is important to display an unwavering willingness to listen and accept feedback. Investors don't want to work with someone that has all the answers and thinks they don't need help or guidance. When founders actively seek feedback or advice from potential investors, it sends a message that their business can continue to grow even after securing funding. It shows that the founder is interested in establishing a successful partnership and isn't just looking for a quick fix. Additionally, this kind of open dialogue between founder and investor gives them both the chance to get to know each other on a personal level: understanding the motivations and goals behind each person’s investment helps create more trust and respect between both parties.

 

In conclusion, being an effective entrepreneur that draws in investors requires a diverse set of skills, some of which include being honest and realistic about the size of one’s addressable market, reliable and accountable in terms of following through on commitments, patient and not desperate for investment, humble rather than arrogant or defensive, and open to feedback. All these qualities are important to demonstrate when seeking investors and can help create a strong foundation of trust between both parties.

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