Professional financing is essential for the survival of startups. Attracting funding requires being very well aware of what investors want and need.
How are companies born? It can all start with something as simple as a basic business plan scribbled on a cocktail napkin. If the initial enthusiasm can withstand a more serene and less enthusiastic scrutiny, it may be time to resort to the three famous “f’s”- Family; Friends and Fools – to raise enough funds to set up your new business.
From that stage onwards, it’s when things start getting serious. All businesses need fuel, i.e. funding. And to secure the right amount of funding, it is essential to present the project in the most professional and structured manner possible.
In its tenth edition, the BBVA Open Talent competition solidified its standing as one of the main promoters of the global fintech startup ecosystem. In Spain, the startup scene has been gaining traction thanks to the emergence of a fully-fledged investor ecosystem that is now capable of covering all sides of the startup funding spectrum: from seed capital, to major venture funds, frequently specialized in business areas. But, what must a digital entrepreneur know about these investors, pivotal to a startup’s survival? What drives these key players to invest, or not, in a startup?
José Luis Biaggio and Javier Mencía are part of this investor community. They are both partners at Making Ideas Business, a digital startup investment club that has already invested in 8 emerging businesses since it first launched in 2012. Recently, they delivered a presentation at ISDI, a school of digital business in Madrid, and shared some of the insights they’ve drawn from their personal experience, as well as some general principles.
One of the key takeaways from their speech was that the first thing entrepreneurs need to do is to step into investors' shoes, try to see things as they do. And this requires replacing enthusiasm with hard and cold analytical mindset. “Investor are pragmatic individuals, not idealistic people,” said Mencía. “They look for feasible, viable and scalable projects;” i.e., businesses that after reaching a specific critical mass, can start growing exponentially without sensibly increasing their basic costs.
Both investors broke down the ten questions that entrepreneurs need to address before pitching their projects to potential investors. The idea would be, in short, to come up with a convincing answer to each one of the following questions:
- Is the project aimed at solving an issue or covering a need detected in the market?
- Does your company really have the key to solving that issue/need?
- Is the market big enough?
- Have you clearly identified the commercial target at which your company is aimed?
- Are there any competitors?
- How are you going to ‘sell’ your product or service, how are you going to market it?
- Is your company scalable?
- How are you going to measure your performance, what metrics are you going to use?
- What’s your team like?
- What’s your economic valuation of your company?
Much as in a videogame where you are required to complete one level at a time to reach the end, these questions are successive. It is at the end when the investment - and the company stake that said investment yields – is negotiated, based on the valuation of the company. There are no exact formulas to determine the value of a startup, said the speakers. In any case, investors always aim for the highest potential returns (such as multiplying by eight their investment), considering that about 80 percent of startups fail. That is why investors calculate that, when an investment is successful, it needs to yield huge returns.
Startups hardly ever pay dividends, the investment’s liquidity is limited to very specific windows of opportunity, the risk of going out of business is really high, and the profitability of some of the ones that end up making money is so low and stagnant that they virtually become zombie projects. Starting a business is an extremely risky sport, both for entrepreneurs and investors. That’s why before trying to ask for funds, you should be aware of what it is exactly that they are looking for and what you can offer.