What one investor looks for before supporting a tech startup
As an investor in startups, people often ask me what I look for during a pitch for money from a tech startup. Here are a few questions I need answered before I’ll even consider investing:
- Does the product or service serve a real need — or is it a company in search of a problem to fix?
One of the first things I need to hear during a pitch is that a product or service will solve a real problem. Convince me that the problem you’re going to solve is big enough that it will make a noticeable difference to people or business owners and will change their lives. If it takes more than a few minutes to explain why the market needs your product, I’ll probably be skeptical.
- Can the product or service be delivered cost-effectively?
The product or service needs to be priced appropriately for your market. I won’t invest in a startup if it appears that the cost of delivering the goods into that market will be more than buyers are willing to pay.
- Who’s the team behind the idea?
Startups are like a rollercoaster ride. You need team members who will get up when they’re knocked down and who will be there for you when things get gritty, instead of leaving you behind in the trenches. Ideas will likely need to change as you approach product launch, especially if you’re a technology company in the early-to-growth stage. Your product development team needs to have the tools in place to accurately read emerging market trends and shifting consumer preferences and be able to adapt to them, sometimes over just a few weeks. In the fast-moving world of tech startups, teamwork is everything.
- Can you attract customers to your platform cost-effectively?
One thing we spend a lot of time on at our venture capital company, Round 13, is finding out whether a company can affordably attract customers to its platform. For example, a lot of fintech companies have not been able to get the cost of customer acquisition down low enough for what the customer will return to them over a reasonable period of time. Unless you can do that, you can’t expect your gross margin to ever cover your operating expenses. One fintech that claims to have overcome that hurdle is Mogo Finance Technology. President Greg Feller says his agreement with Postmedia exchanges a fixed value of media promotion for a revenue-sharing deal. He credits that deal with lowering his cost of customer acquisition to a level that makes sense.
- Does the startup make creative use of existing inventory?
Some of the most valuable and successful technology companies don’t make anything. They just connect unused assets with customers and make things more efficient. Two great examples are Airbnb and Uber. As an investor, that concept is exciting to me, because you eliminate the incredible amount of capital required to build things or stock inventory. Whether you’re leveraging unused warehouse space or idle equipment, building a business on existing inventory is an attractive proposition.
- Is there an opportunity for recurring or subscription revenue?
I love all revenue, but a one-time sale interests me far less than recurring or subscription revenue, which paves the way to long-term business viability.
As an investor, I can’t predict the future. But I know what I want to see in a tech startup before I’ll give it a second look.
Bruce Croxon is co-host of BNN’s The Disruptors and partner at Round 13 Capital. On March 27, Bruce will be the moderator of an NP Talks event on how to disrupt your business.