Startups  February 26, 2018

Ask them anything: Two investors share what they’re looking for

Entrepreneurs should be just as critical of potential investors as investors are of the companies they’re vetting.

“Evaluate your investors carefully,” advised Barbara Bauer, director of the Women Investors Network for the Rockies Venture Club and panelist for “Ask Me Anything: Women Angels and Investors,” a venture-capital Q&A at Fort Collins Startup Week. “There are smart investors and less-smart investors, who are OK unless they’re telling you how to run your business. Are your investors smart and can they help you, or do they have money but advise you in ways that are not helpful?”

Bauer and co-panelist Margaret Burd, a longtime entrepreneur who founded Magpie Software and was CEO until it was acquired in 2017, answered entrepreneur questions on how to seek and work with investors.

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To find the right investors, Bauer recommends starting simple.

“Get involved in the ecosystem” she said. “Begin to get to know the investors.”

Investors typically are focused on a niche, she said, such as health care or software tech, although some investors have more general interests. But they all have the same question.

“What they’re looking for, no matter what the sector is, is if there is an idea or problem that matters. Is there a market segment that needs this solution, and does the entrepreneur know how to go to market and how to manage the operations of a business?”

Additionally, investors want entrepreneurs who are prepared, who know how to pitch and present themselves. Investors want to see a good business model that knows how it will make money and see that it’s gotten feedback from the market. What is more, investors want an exit strategy, because that’s how they make their money, Bauer said. And they want to know what the future holds.

“We look for a five-year estimate on growth and revenue,” she said. “And you might think, how could I possibly know that? It will never be correct or accurate, but it shows that you’ve thought about the business.”

Rarely do investors just want to see an idea, Burd said. Relying on getting lucky won’t work. Rather, investors like to see that an entrepreneur has put more than time and effort into their startup, but has made their own investment.

“Invest something” she said. “That doesn’t mean it has to be lots, but you have to put some money into the first phase. And you have to do that anyway, because you’re not going to get anyone to just invest in an idea. Get that idea nicely put together into a business plan and start talking to people you know. And take them to coffee. Not lunch, because you have to buy lunch,”  she added with a laugh.

One common misstep some entrepreneurs make, Burd said, is that they don’t want to talk about their business when it’s in its early stages because they’re worried potential investors will steal their idea. But she said that’s not likely to happen.

Bauer agreed. “If someone asks for an NDA, it’s like, bye.”

“It shows them you’re not savvy,” Burd said. “And they’re talking to a lot of people, they might slip something, it happens. Don’t tell them something you don’t want them to know.”

One thing many investors are looking for is evidence of market need before investing. That might be sales, or it could be trials with potential customers that prove the product is attractive.

“We want to see evidence of traction,” Bauer said. “Sales is the most obvious, but it’s not the only one.”

To get traction, many startups will take on debt. That might seem like a deterrent to investors, but it’s not necessarily.

“We see a number of entrepreneurs who are in that situation,” Bauer said, “and it depends on the terms of debt and what your company’s ability is to serve that debt and get to the point where you’re growing. Debt in and of itself is not positive or negative, but it’s what impact does it have on the operation and working capital of the business.”

“Most investors are savvy enough to get that,” Burd said.

Bauer added that no startup is alone when it comes to potentially having hiccups.

“There’s no perfect venture,” she said. “None of you have a company that is the ideal of a startup company. Everyone has edges and corners and challenges. You have to know how to tell your story and present your business model as a way to get ahead of that debt so you company goes to scale.”

As to women in the industry, Bauer said that 60 percent of the ventures Rocky Venture Club invests in are women lead, and 40 percent of them are impact companies that have objective that support social or environmental issues. The Women’s Investor Network aims to get more women investors in the mix, but isn’t looking to keep them in a separate organization.

“We want to get women around the table,” she said. “We do a lot better when women and men are around the table together.”

 

Entrepreneurs should be just as critical of potential investors as investors are of the companies they’re vetting.

“Evaluate your investors carefully,” advised Barbara Bauer, director of the Women Investors Network for the Rockies Venture Club and panelist for “Ask Me Anything: Women Angels and Investors,” a venture-capital Q&A at Fort Collins Startup Week. “There are smart investors and less-smart investors, who are OK unless they’re telling you how to run your business. Are your investors smart and can they help you, or do they have money but advise you in ways that are not helpful?”

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