MaRS Library What investors look for in a technology investment
Investors seek profitable market opportunities with a technology business that is based on a product or service that solves real customer problems.
Many ideas and technologies may exist, but most cannot meet the full scope of investment criteria from angel and venture capital investors. Investors rarely find an outstanding opportunity.
One example of an exceptional investment was Ontario-based Research in Motion (RIM). RIM completely changed the way customers could receive email while away from their offices, filling a need that had not yet been met by any other device or technology. RIM developed a business model which used wireless service providers as their distribution channel; this led to rapid expansion of their customer base, significant revenue growth, and of course, profitability.
There are many examples of excellent technologies that did not address a customer problem or need and therefore did not succeed as a business opportunity.
It takes more than a brilliant technology for your business to thrive. Customers need to be willing to spend money to solve their problem and to prioritize obtaining the solution. For example, if you have a wonderful idea but due to tough economic times customers do not want to spend money to buy your product, then your idea remains just that: an idea, not a business.
What investors need to see from your business
A clear description of the problem that your business is trying to solve in the market
This includes proof that customers are willing to pay to solve the problem, and proof of how your product or service lessens the pain or solves the problem.
Potential for high growth
Your business must address a large or growing market opportunity, and you clearly understand the customer segments and competitive landscape in your target market(s).
Sustainable competitive advantage
You should have few large competitors or well-funded new entrants already in the target market. Investors want to see a protected technology or a business model that will provide a sustainable advantage for the business and its customers.
Financial return on their investment (ROI)
You need to have developed a sound financial plan that demonstrates how your business will make money and some reasonable scenarios about when your investors will receive a cash return on their investment. Of course, this must be supported by the valuation and terms of the current investment round that the business is asking the investor to consider.
An experienced management team with a thorough and credible execution plan
Ensure that your team includes people who are leaders in their field, have a customer focus and understand the specific sub-segments of your target market. Ideally, your senior team will consist largely of individuals who have prior experience in a technology start-up. Your team should reflect the characteristics of successful entrepreneurs: passion, creativity, strong leadership skills, and an ability to be flexible and adapt to market changes.
How much risk will technology investors accept?
All types of investors at all stages of the funding life-cycle seek similar characteristics in their investment opportunities. Early-stage investors will accept more risk associated with market and customer validation and on the perceived execution skills of the team than later-stage investors. Later-stage investors will demand more evidence of market and customer validation to support their investment.
Early-stage investors versus venture capital investors
In the area of growth potential, angel and early-stage investors differ from venture capital investors. Angel and early-stage investors who deploy small amounts of capital will often fund smaller opportunities.
In contrast, venture capital investors, particularly those in later-stage funds, require substantially higher growth potential for the investment opportunities they evaluate. This is because they tend to invest much larger amounts of capital so the ultimate value of the business needs to be much higher for them to earn a similar rate of return.
Credibility is key to the success of you and yourtechnology business. Your business should be entirely clean (that is, with a clean structure, clean IP, and so forth) and free of complications that could present an obstacle to securing an investor.
Guy Kawasaki, an investor and frequent writer on entrepreneurs and startup businesses, offers a great blog entry on what investors seek in a deal.
Remember that technology investors also evaluate what they themselves bring to an investment opportunity. They may turn down a strong investment opportunity if they do not believe they can add significant value.
e-Coach Venture Financing. Retrieved April 19, 2009, from http://www.1000ventures.com/venture_financing/investcriteria_bavc_hbs.html.
Kawasaki, G. (2004). The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything. Toronto: Penguin Canada.