Investment Criteria

Investors look to invest in businesses whose technology, goods, or services improve home,
workplace, or educational life. Some investors choose to invest after "friends and family" and before
an institutional round, while industry terminology and interpretations of stages differ. In addition to
providing financial support, they also operate more strategically as mentors and/or advisors through
their networks and experience.

ExxonMobil to Walmart—or any other company of any size—faces very comparable strategic issues.
Questions like client acquisition, growth funding, financial reporting, and human resource
management are frequently common issues, despite the scale and magnitudes frequently varying.
Investors occasionally put their money into people rather than businesses, such as the company's
founders and co-founders, and the potential for success they hold. Investors prefer investing in
startups because they can speak with the founders directly to find out what needs they are
addressing, why they think they are unique, and how they plan to approach the market.

Investor seeks investment opportunities for early-stage businesses that fit the following investment
criteria:

 Innovative technology, method, product: Bringing a fresh perspective to address a big

consumer demand or issue. Not necessarily game-changing.
 Scalable: Able to expand into a sizable, global company with a defined development strategy
to do so.
 Possessing distinctive qualities or exclusive traits that make it tough for future competitors
to enter the market is a sustainable competitive advantage. A "moat" of some kind.
 Strong business model: Demonstrating what is necessary to attract and keep customers as
well as increase revenues significantly while remaining profitable.
 Revenue generating, or near to it: Investors do not invest in ideas or prospects in the very
early stages of development. They would rather see sales from existing clients or, at the
absolute least, pledges from prospective clients. The better it is, the greater traction.
 Additional funding: The investor also sees how many rounds of funding have been
conducted and at what valuation. Valuation plays a major role in this.
 Exit potential: The investor is aware that it takes time for firms to get traction in the
marketplace and expand. They are more willing to invest in businesses when an early exit is
anticipated.
 More than One Co-Founder: 2+ co-founders provide a level of resources, teamwork, and
compatibility to the company.

Investor’s perspectives and how they evaluate a startup idea

Giants like Apple, Facebook, Amazon, Microsoft, and countless other innovative companies owe
their early success to Venture Capitalism and the capital and coaching provided by VCs. To
understand how startups are evaluated it is only fair to look at the techniques and ideologies
followed by VCs while valuing early-stage companies. A survey conducted by Harvard Business
Review found that for each deal a VC firm eventually closes, it considers on average 101
opportunities. Though VCs reject far more deals than they accept, they can be very aggressive when
spotting a company, they like. The same survey also revealed that most VC firms deem the founding
management team to be the most critical. VCs either look for the “horse” or the “jockey” (jockey
meaning the entrepreneurial team and horse being the strategy and business model of the startup).
Early on, VCs are more interested in costs than revenue because the former tells us how startups
intend to develop their company while the latter is small and frequently unpredictable. However,
the things they are assessing are the team's quality, ideas, and talents, and the level of belief in the
market potential. While most CFOs of large companies rely on metrics like Discounted Cash Flow
techniques for evaluating investment opportunities, VC firms don’t particularly focus on the metric.
Since it is a known fact to all VCs that only a few of their portfolio companies will give them
successful exits and 100-fold returns they rely on metrics like Internal Rate of Return and Cash on
Cash Return. The most prosperous investors view rivalry as a sign that your firm has discovered a
lucrative market niche. To address customers' needs more effectively and economically, your firm
must demonstrate how it is uniquely suited to do so. Investors are actually for the competitive edge
that your firm has over its competitors. The majority of early-stage investors are seeking goods and
services that thrill consumers in new ways. Investors prefer to see evidence of traction rather than
hear about the product's potential in the market. The bottom line is there exists no single formula,
algorithm, or playbook that unlocks a universally accepted approach to assessing early-stage
investments. To master startup metrics, evaluators should look to focus on two or three Key
Performance Indicators relevant to the company and the industry. These metrics and their
comparison to others in the industry would generally provide an overall view of the financial future
of the company and after looking at the entrepreneurial team and the strategy they propose, early-
stage investors can move towards deciding on their investment.

What kind of investors look for early-stage companies?

Investing in startups during the initial seed rounds and beyond is done majorly by angel investors
and angel groups. Angel investors are wealthy private investors focused on financing small business
ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund, angels
use their net worth. Angel investors may also be more tolerant of entrepreneurs and willing to give
lesser sums of money over a longer period than venture capitalists. They do, however, expect to see
an exit strategy at some point, often in the form of a public offering or an acquisition, so they can
keep their earnings. Numerous sectors are supported by angel investors. For the first time in several
years, angel-funded enterprises were at the seed and startup stages in 2020, according to the Center
for Venture Research at the University of New Hampshire. A 6 percent increase over 2019 was seen
in the total investments, which came to $25.3 billion.

Another source through which startups can raise capital is through Incubators and Accelerators. A
business incubator is a program that supports early-stage startup companies to expedite profitability
and success. Startups can benefit from incubators' invaluable resources, which include no-cost office
space, tools, mentorship, a supportive community, and networking opportunities with possible
investors including venture capitalists and angel investors. Business incubators concentrate on start-
up companies that are still working on their business models and product ideas.

Whereas a startup accelerator program expedites the growth of existing companies that have
developed business models and validated products in the marketplace. Startup accelerators give
businesses access to essential tools including mentorship, free co-working spaces, legal services to
protect intellectual property, a collaborative work environment, and connections to influential
people in the industry and potential investors. Startup accelerators give businesses access to
essential tools including mentorship, free co-working spaces, legal services to protect intellectual
property, a collaborative work environment, and connections to influential people in the industry
and potential investors. Business incubators and startup accelerators both offer early-stage
companies support and mentoring throughout the entrepreneurship process, but there are many
notable differences between the two. Firstly, the biggest difference between accelerators and
incubators is the stage of the venture they focus on. Incubators concentrate on early-stage
businesses that are still developing their products and do not yet have a developed business plan.
Accelerators concentrate on accelerating the growth of already-established businesses by having a
minimum viable product (MVP) in the hands of early adopters and a proven product-market fit.
Secondly, although incubators occasionally request an equity stake in return for the important
services they provide, they rarely put money into new businesses. Accelerators frequently provide
businesses with a seed investment in exchange for an equity part in the business. Thirdly, Ventures
are often developed more slowly at business incubators. Their objective is to nurture a business idea
for however long it takes to establish a profitable firm, which could be one to two years. On the
other hand, accelerators often only last three to six months and function more like startup boot
camps.

Conclusion
Investors invest in early stage companies that have innovative technology entering niche markets,
scalability to expand as a global company,strong business model to remain profitable, more co-
founders to have diversity and compatibility in the team, etc. Venture Capital firms play an important
role in evaluating the startups. They are mostly in search of an entrepreneurial team, good business
model, strategy, etc but the truth is that there is no single method to assess early stage investments.
Initial seed rounds of startups are generally done by angel investors.A 6 percent increase over 2019
was seen in the total investments by angel investors, which came to $25.3 billion. The startups also
raise capital through incubators and accelerators.They both seem similar but have some differences
mainly being incubators focus on early stage companies with an objective to work on business ideas
while accelerators focus on growth of already established companies and work more like startup boot
camps.