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How to See Your Startup as Accurately as Investors Do

Ready for Investors? Here are a few tips to do an Honest Evaluation First

What do investors want? The answer sounds obvious at first — to make the biggest return possible. But once you start trying to attract investors, you realize every aspect of your business — big or small — will be under a microscope because it all contributes to your venture’s anticipated performance.

Investing involves a tremendous amount of research, study, and careful analysis. However, at the end of the day, the choice to invest is a gut decision, one that is driven by feeling more than certainty. So, what gives investors the feeling that an unproven startup is on the path to success?

The answer is different for every investor, but it all relates back to confidence. They want to put their weight behind great ideas that consumers will get excited about. Equally, they want to work with competent entrepreneurs who balance vision and savvy.

It probably comes as no surprise that startups need to be compelling in order to attract investors. What many overlook (and why many struggle to secure funding as a result) is that image and perception count for a lot during these deals. Investors will run the numbers and scour the books, and they will also give your business the smell test. Here’s how to pass:

1. Demonstrate that you care about security.

Cybersecurity is a bigger issue than ever. The threat of hackers, data breaches, and malware is substantial and matched by the threat of regulatory noncompliance, legal issues, and bad publicity. It is not an overstatement to stay that a single cyber incident can ruin a business, especially one in the fragile startup stages. Not surprisingly, investors want to see evidence that growth-oriented companies have studied these issues and put protections in place. If they haven’t, those companies are courting risks in a way that is extremely unattractive to investors.

David Wagner, CEO of the email security provider Zix, underscores why security is essential for startups. “It’s understandable that cybersecurity is becoming an important part of the due diligence that precedes an acquisition offer. It’s now up to the startups and small businesses of America to protect their valuation and make effective cybersecurity a priority.” It may not be the first issue that you worry about, but it needs to be high on your priority list.

2. Prove you’re a good fit for their investment portfolio.

Remember that investors are fundamentally self-interested. The success of your business comes second to the growth of their own bottom line, so your venture needs to fit well into their existing investment portfolio. This congruence is good for the investor as well as the business, which is why both parties should honestly evaluate the pairing and be willing to walk away if there are conflicts or it proves not to be a good fit. Notable investor Bob Rice puts it succinctly, “Most VCs will go through a checklist and everything’s got to meet our criteria. If we’re vegetarian, we don’t want to see a steak.”

The wrong fit isn’t just undesirable, it’s untenable. As tempting as it may be to ignore or explain away points of friction, investors and businesses alike should want the right partnership, not just any partnership. Do your homework to understand what an appropriate investor looks like for your industry. Take into account the capital you’re looking to raise, whether or not you plan to use an accelerator, and whether you want angel investors or institutional investors. Also consider the sorts of companies a potential investor already has a stake in. Does your company complement or clash with them?

3. Develop a rock-solid budget.

No matter how promising a business may be, if the numbers don’t add up, no serious investor is going to want to get involved. Take advantage of the numerous free resources online, such as those from the Small Business Administration, to guide you as you build your budget. CC Chang, the entrepreneur behind the entertainment app FunNow, has this to say about attracting investors: “They only believe in numbers, otherwise you will find Angels, who believe in a dream. But investors, they believe in numbers.” Some supporters will commit funding based on an individual or an idea, but most will want to see potential that is borne out by your company financials.

They will look at things like your net profit, sales, margins, cash flow, customer acquisition cost, debt, and other factors. Any one of these metrics could spark confidence or caution, but you need to be totally transparent throughout. It’s important that you don’t run these numbers on your own; have a skilled accountant (preferably one with experience in business investments) compile and verify these numbers. You can’t hide or fake your finances, which is why a straightforward approach is the only option.

It’s never easy to evaluate a business objectively, especially if it’s your brainchild. However, it’s important to stop thinking like an insider and start thinking like an investor. What sorts of risks and liabilities might you be overlooking, and how much value can you really provide? After you develop honest answers to those questions, you can develop genuine appeal to investors.

Long-shot third parties are everywhere this season. That says something about Americans’ perspective on the economy.