If you're an entrepreneur seeking funding for your business, you've probably heard this before: investors don't fund 'ideas.' It's a frustrating reality that many entrepreneurs face. But why is this the case? In this blog post, we'll explore why investors prefer startups with traction and customers and what entrepreneurs can do to increase their chances of attracting investment.
Have you ever wondered why your brilliant idea has yet to attract additional investors? You may have the next big thing, but you need to understand why investors don't fund ideas, or your dreams of turning your vision into reality may remain just that - dreams.
Securing funding for a new idea is a common struggle for entrepreneurs and innovators. Despite the countless success stories we hear about, the reality is that most ideas need more financial backing to take off. Understanding the factors that discourage investors from funding ideas is crucial to increase your chances of success.
While having a great idea is a good starting point, more is needed to secure funding. Investors have specific criteria and considerations that they look for when deciding where to allocate their money. By understanding these reasons, you can better position your idea to attract the investment it deserves.
Why Investors Don't Fund 'Ideas,' They Fund Winning Moves
Patrick Thean, a leading expert on strategy execution and WSJ and USA Today bestselling author, often talks about "Winning Moves" in the context of business growth. In simple terms, a Winning Move is a significant, game-changing initiative that has the potential to increase your company's growth rate significantly. It's not just a regular business decision; it's an important play that can help you leap ahead of your competition. This could be launching a new product that opens up a new market, a strategic acquisition that expands your capabilities, or any initiative that could double your company's size or value. The key is that a Winning Move needs to be both ambitious and achievable, potentially impacting your business's future significantly.
Investors put their money at risk when they invest in a startup, so it's understandable why they want to see some proof of concept before committing their funds. That's why they look for startups that have traction and customers. These startups are more likely to be successful because they have already proven that there is a market for their product or service. Investors want to see that the entrepreneur has worked hard to find a problem people are willing to solve.
You've Outgrown Entrepreneurial Operating Systems
But it's about more than finding any problem. Investors want to see that the startup is focused on solving a significant problem, not a minor annoyance. They want a solution that directly addresses the issue rather than something tangential. This way, they can be confident that the startup solves a real customer pain point. This is when you've hit the big time and must build business processes and rhythms. Ideas can get you far; you might have even created a job for yourself and others, but have you achieved your BHAG?
What are your long-term goals? You'll need a system with clearly written SMART goals, supported by the latest AI technology, that is connected to your day-to-day operations. Just because you've gained some traction with an idea, it is time to get into a regular rhythm of work where you have a cadence to achieve your big goals effectively. You spend time working on the business, not just in the industry. This is when you need to rely on a business operating system.
Choosing and Tracking the Right Metrics
Investors also want to see that the entrepreneur understands the target customer and has their ideal customer persona clearly defined and documented; you can't rely on it being understood intimately by the entrepreneur alone. This understanding helps in building a solution that resonates with the customer. Additionally, investors want to see that the entrepreneur has proven that their solution resonates with the target customer. This proof can come in early traction, such as expressions of interest, sales, or a waiting list.
Speaking of early traction, investors want to see that the startup or early-stage business has a repeatable process for bringing in more customers. They want to see that the startup has a clear plan for growing its customer base and that additional funding is needed to turn it into a rocket ship. This is important because investors know that it's a numbers game. They may invest in 100 companies, but only one or two will return tremendous results. To make their fund profitable, they need to see the potential for a 100X or 200X return, so you need to consistently be working on your longer-term plans and be able to pivot when the opportunity arises.
Top Entrepreneurial KPIs
Entrepreneurs are constantly striving to develop and grow their businesses. To do so, they must keep track of various performance metrics known as Key Performance Indicators (KPIs). These KPIs help entrepreneurs measure their progress and determine where to focus their efforts. Here are some of the top entrepreneurial KPIs that investors look for when evaluating potential investments:
Customer Acquisition Cost (CAC): Every entrepreneur needs to have a process for attracting and retaining customers. Investors want to see that the startup is efficiently and effectively generating new customers and will look at the CAC as an indicator of success. The lower your CAC, the more sustainable your business will be in the long run.
Revenue Growth Rate: The revenue growth rate shows how revenue increases or decreases over time. Investors want to see a steady increase in sales, which indicates that the startup has a product people are willing to pay for.
Lifetime Value (LTV): LTV measures how much profit the company makes from each customer. An increasing LTV means that customers are returning and spending more money with the business, indicating that the industry has a product that people are happy with.
Lack Of Clearly Defined Problems, Processes, and Metrics
Attracting investment can be difficult, but understanding what investors seek can increase your chances of success. Investors want startups with traction and customers because they have already proven they are solving a real problem for their customers. Entrepreneurs should focus on solving major pain points with a well-defined target customer and show early traction. Additionally, establishing a precise and repeatable process for bringing in more customers can help increase investment interest. Remember, investors are looking for home runs, not singles. So, if you're looking for investment, ensure your startup has what it takes to hit it out of the park.
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Photo Credit: iStock by Getty Images
Photo Credit: iStock by Getty Images