What does it mean to be investor ready?

by Gati Kalim

To not rely on bootstrapping and growth from cash flow to build your startup, you need external capital. Possible providers of capital include banks and investors. Banks are much more skeptical about the business models of start-ups than investors. As investors are the ones who usually support high-risk financing over several phases, anyone who wants to grow strongly will often have to get them on board in various financing rounds. To convince them to invest, founders and start-ups must be "investor ready".

Obtaining funding from investors can be an exhausting process that is time-consuming and at times very stressful. However, increasing the degree of “investor readiness” can decrease the length of time to obtain the investment and decrease the costs associated with it.

To achieve a higher level of “investor-readiness” you should have concise answers to key questions and facts investors usually want to know about, e.g.:

• How are you going to enter your target markets?
• What is your market position and how can you protect it? Who are your competitors and what makes your product unique?
• Can you explain how your product will evolve? What does your product roadmap look like?
• How can you show that there is demand for your product? What about your past traction?
• How aligned is your founder team? Does everyone have the same goals?
• How well are you able to articulate the nitty-gritty details of your startup?
• Who are the most suitable investors? What are you planning to do with the funds received?

The needs and requirements of the respective investor groups vary depending on the phase. While business angels usually invest in an idea and a founding team in the early phase of a startup, venture capitalists (VCs) or private equity companies often invest in business models that are already established in the market in later financing rounds. It Is essential to understand what each type of investor can offer, including any potential additional benefits that a strategic investor may provide as part of their investment proposition.

All investment phases have one thing in common: For investors to be willing to invest their money and take the risk, certain basic requirements must be met:

The business plan should provide a clear picture of the current state of the business, its purpose, goals, and objectives. It should also clearly articulate the initiatives the business is focused on executing to reach those objectives. Thereby it should identify the need for additional resources, and how this will assist in reaching the strategic goals. Growth is usually the focus of investors as they aim to increase the capital invested as much as possible.

The USP of your solution or product is what makes your company valuable to its target audience. In other words, it is the reason why customers buy your product instead of buying the product of your competitors.

Developing a USP begins with your target market and customer. What do you know about your target customer and why are they interested in the market you are active in? What are the jobs to be done? By consulting customers, colleagues, and friends, you should be able to make a list of all the reasons why your target customer should buy your product or service.

The market size of your target market is the other influencing number. It shows the investor what potential the business idea has.

Especially in the earlier phases, the company valuation is based only on planned figures and assumptions. The figures should be as realistic and comprehensible as possible and provide evidence of the future growth story. If you do not yet have any historical figures, it is essential to work with assumptions that are customary in the industry you are active in. The figures from the business and financial plan are the basis for later investor reporting, i.e., the success of the founding team is measured against these figures.

Founders should attach high importance to transparency to set the basis for a long-term and trusting relationship with the investors right from the beginning.

Creating transparency is not always easy. It begins well-ordered, however, things quickly become confusing, especially if the venture is growing in terms of personnel and clients. But at the latest before negotiations with investors and due diligence, things should be tidied up.

In most cases, the return sought by the investor is realized through an exit. Accordingly, it is important to outline possible exit scenarios for the investor at an early stage already. Most investors are looking for the potential to increase the value of their investment min 5 to 10 times within 3 to 5 years.

It doesn't matter whether you meet all the points on the investor readiness scale if the market environment isn't right, your industry isn't en vogue at the moment or investor XY has just made a similar investment, it's going to be difficult to get the financing you're looking for. That's why next to a convincing solution and an extensive investor outreach you need a good portion of luck.

Nevertheless, start the investor outreach early and build up an investor network. Fundraising/Venture Capital is a people’s business. The longer you and the potential investor know each other the better you can evaluate if there is a match. This phase can also run parallel to the MVP development phase and reduces the risk that you are running out of time and are forced to conclude negotiations quickly and to your disadvantage.

All our Venture Teams do receive a single-digit million investment from Chemovator as their sole pre-seed investor. The investment provides them with the unusual benefit to work on a team, product-market-fit and traction along a 24-36m runway without having to fundraise in the meantime.

Next to capital, the teams receive access to working space, time, and resources. Combined with an intense, hands-on mentorship from Chemovator’s Entrepreneurs in Residence and access to an extensive network of BASF colleagues, various external partners and investors globally, Chemovator aims to set the stage for the future success of the team and supports them in developing into a scalable and investable business.

After successfully exiting the program, the teams usually go for a late-seed/pre-series A fundraising and need to start their external investor outreach:

The most important building block while fundraising at the late-seed/pre-series A stage is a well-positioned founding team. The founding team must complement each other in terms of expertise and skills and have a large portion of the startup mentality. It is therefore not surprising that investors place the highest priority on the founding team.

The personal fit between the investor and founding team must be given. This personal component is particularly important in this early phase, as the investor is often very closely involved in the development of the startup. It loses relevance in the next financing stages. In addition, the business idea must fit the investor’s investment sweet spot.

Next to the team the product and USP are of relevance. The founders should already be able to present a first version of their product to improve investor readiness.

Traction is the third and last essential building block and the quantitative evidence of market demand. Traction is based on actual users and potential buyers. It is not only about selling ideas & visions but showing execution and customer satisfaction.

Before approaching investors, founders should understand key terms of a term sheet e.g. vesting, dilution, milestones, liquidation preference, drag, and tag-along. A very helpful reading I can recommend here is the book “Venture Capital Deal Terms: A guide to negotiating and structuring venture capital transactions” written by Harm de Vries, Menno van Loon and Sjoerd Mol.

In the subsequent financing phases, the balance shifts from the previous focus on the founding team to the company organization, business model and market success. The decisive factor is how quickly the company can grow or scale. The focus is on entering new markets or developing new products. This is usually accompanied by strong growth in the number of employees.

The initially strong bond between the investor and the founding team decreases significantly in the financing rounds following the seed phase. Due to increased reporting obligations to professional investors such as VCs or private equity companies the transparency requirements for the startup also increase significantly. The company is also increasingly managed using key figures and key performance indicators.

In addition, after the initial growth phase, which is often chaotic in some startups, processes must be increasingly established and optimized to lift the startup to the next level in organizational terms.

While the focus in the seed phase is still on the founding team and the personal relationship between investors and founders, the emphasis in the following phases shifts towards market presence, product, professionalization of company processes and strong growth.

As a founder you should keep in mind that fundraising is not a straight process - it is a bumpy road. Better start early than late and pivot along your learnings and the process. Being able to show and prove product-market fit with a full customer pipeline and convincing conversion rates next to demonstrating the scalability & profitability of the investment case will increase your chances of successful fundraising.

Sounds familiar? What’s your experience in getting investor ready? Let us know in the comments.