In my latest book, I devote an entire section to what entrepreneurs should look for in potential investors. However, I’ve never explored a more pressing issue of what investors look for in potential portfolio companies.
I’ve gone through two major investment rounds at my company, BodeTree, and am in the process of finalizing our third. Through those experiences, I’ve learned a thing or two about what investors really care about.
There’s a common misconception among entrepreneurs that investors care about flashy technology, early growth, or fear of missing out. Each of those things plays a role in their decision-making process, of course, but they’re not the most important things investors look for. Knowing what really matters can be the difference between a successful entrepreneur/investor partnership and utter disaster.
The ability to balance strategy and execution
Entrepreneurs usually end up falling into one of two categories: big-picture “strategy people” or tactically-focused “execution people.” Successful CEOs, however, possess the ability to balance both skill sets. That’s why founders are so often replaced by seasoned leaders once their company takes off.
Good investors realize that strategy and execution must remain in balance for a company to succeed. As a result, they’re going to look for a clear path forward toward a state of balance.
There are two ways to accomplish this. First, they look for founders who possess enough self-awareness to know their own weaknesses. These founders are the ones who can either grow into the executive role or get out of the way. The second option is to seek out the rare founder who already possesses the ability to think big and still get things done.
A hungry team
In a startup, there’s no room for complacency. Every team member, from the founder all the way down to the newest intern has to show a hunger for success. Anyone who treats their role in young company as a typical nine to five job is destine to fail.
Investors look for this culture of ambition when deciding who to support with their time and money. Positive signals include team members who have a demonstrable passion for the business, consistently go above and beyond the call of duty, and always push themselves to their limit.
Every business will encounter roadblocks and challenges while navigating the market. If a team is aligned, motivated, and hungry, almost every one of these difficulties can be overcome. Hungry teams are productive teams, and investors know it.
Integrity above all else
There are few things more uncomfortable for entrepreneurs than the investor due diligence process. Before an investor jumps out of the proverbial airplane with an entrepreneur, they’re going to want to know that they have a working parachute. That’s what the due diligence process is all about. Investors dive into the weeds to understand the company’s past, present, and future performance before making a decision.
There can be a very strong temptation on behalf of entrepreneurs to try and sugarcoat the data that is provided to investors. After all, business is almost entirely personal for founders, and the company’s failures are perceived as personal failures. However, entrepreneurs must learn that investors care about integrity more than past results.
Every company has challenges, failures, and skeletons in the closet. However, these issues only become a problem when they’re not disclosed. Investors want entrepreneurs who demonstrate integrity and disclose issues early on in the due diligence process. It seems counter-intuitive, but proactively addressing your weaknesses can go a long way with investors.
Good investors are going to do their homework before investing. Entrepreneurs must recognize this and learn to demonstrate patience, integrity, and grace throughout the entire process. Because at the end of the day, investors care more about these fundamental traits than anything else.