Many new entrepreneurs looking for investors often ask: What do investors look for in a startup?
It’s a great question. Every venture capital firm has its own thesis and criteria when investing in startups. Some firms focus on a particular industry, such as cybersecurity; others on a specific technology, such as blockchain; still others only invest at a certain stage in the startup lifecycle.
At York IE, when we meet a new startup looking for investors, there are a lot of factors that go into our decision of whether to invest or not. In general, we only invest in startups at the earliest stage through Series A. We’re also primarily focused on B2B SaaS companies with subscription-based business models.
Furthermore, we take a market-in approach to investment decisions and place tremendous emphasis on the people within a company.
The market-in approach to investing means what we look for in a startup is not just its total addressable market. That is a factor, but we’re not just going to invest in some cloud company because we know that the worldwide public cloud services market is projected to grow.
Instead, we evaluate a company’s strategic value in how it would fit into a market and competitive landscape. Founders are often very product focused, which is a good trait. But if you don’t look outside your four walls, then you will miss what other players are doing and how they are innovating. Often, competitors are doing similar things. So it is important for us to know all of this and help the companies we work with think strategically around collaboration and differentiation.
When it comes to differentiation, we’re always looking for the competitive moats. What are you doing that would be very difficult to replicate? What kind of defense are you building that makes it difficult for an enemy to storm your castle?
The market-in approach also offers us a gut check of an entrepreneur. By knowing the players and the opportunity in the market, plus the experience we have building companies, we can usually make an assumption of what sort of opportunity exists. There are a lot of ways an entrepreneur can be successful. Not every startup needs to be a unicorn. Not every startup can be a unicorn.
It is important that an entrepreneur looking for investors understands that. Our market-in evaluation may lead us to the conclusion that an entrepreneur is building a nice business that may be snapped up by a strategic acquirer down the line for $50 million. Given a lot of factors, this opportunity may excite us. But if the entrepreneur thinks he or she is building a billion-dollar company and won’t adjust that perspective, then it might not be a fit.
What Do Investors Look for in a Startup? People!
At the end of the day, to fulfill opportunity, you need a team to execute. That is why we put such a priority on the people behind the startup idea.
We prioritize certain criteria and traits, such as:
We love multi-time founders. They have been through the wringer and know exactly what they’re getting into. That experience adds tremendous value to future startups.
We also look for diversity of experience. People of different ages, genders, races, geographical locations and socioeconomic backgrounds have unique perspectives on life. They look at problems through a unique lens, which is how true disruption happens.
Entrepreneurs looking for investors need to have a vision for what their company can become. But looking off into the great beyond and seeing something isn’t difficult. It is knowing how to actually get there that is what separates successful startups from the ones that fail. We lean heavily toward entrepreneurs who are able to articulate a clear and compelling vision and then have a path of execution to get there.
If you don’t have experience, you need to be coachable. The entrepreneurs we work with tend to be sponges who learn quickly. You can make suggestions and recommendations and they hear them, leave you and come back better than before. I don’t mean they just do whatever we say. But they listen to their advisors, absorb the information and then make the best decisions possible for their company based on all of that insight.
As an investor and advisor, the last thing you want to feel is ignored. Time is the most precious commodity, and if someone feels like their time is being wasted or not valued, they usually pull away. We’ve worked with entrepreneurs in the past who never listened, and we didn’t want to sit there and watch them make the same mistakes over and over. So we minimized our relationship with them.
Which leads to the final, and perhaps most important, criteria of what we as investors look for in a startup…
When deciding which startups to invest in, we ask ourselves a simple question: When this company becomes successful, will we be pumped for these entrepreneurs? And when they have their big IPO or acquisition dinner, will we want to attend?
If we can’t personally root for an entrepreneur, we’ll back off. This may hurt us someday on a particular startup but we’re OK with that.
When we say we believe in everyone of our entrepreneurs and would do anything for them, we mean it. And that’s most important to us in the long term.
If you’re a startup looking for investors, and you’re aligned with what we look for in a startup, submit your pitch.