There are a number of reasons an early-stage tech investor, like Florida Funders, passes on an investment. At Florida Funders, we have developed a process to narrow down over 1000 companies per year to just a handful that meet the criteria we deem necessary for investment. In seeing so many companies, we have seen trends which would be helpful for startups to be aware of when approaching investors.
General Investment Criteria
Florida Funders looks for early-stage technology companies with significant traction. We prefer post-revenue companies, yet will consider investing in pre-revenue companies, given the correct circumstances.
Company stage – We are often approached by companies are not a good fit for funding due to the stage of their company. Many of these individuals are passionate about an idea and have not yet created an investable business. Make sure you are approaching the correct investors that invest in the stage that your startup is in.
No traction – Many investors, especially in Florida, look for companies with proven product/market fit. Focus on selling your product and establishing product/market fit for investors that require traction. Do you require a certain level of funding to get traction? Find angel investors who invest in companies at very early stages.
Valuation – Founders and investors should be willing to come to a valuation that works for both parties. Early-stage investors are extremely sensitive to valuation because it has a strong effect on returns. Be able to justify your valuation based upon traction, momentum, and what has been accomplished thus far, including financial metrics.
Timing – Build a list and reach out to investors 6 months prior to wanting to close. There’s nothing more frustrating than finding a good company that needs to close faster than our due diligence process takes.
Fit – Make sure that the investor is interested in what you are building. If available, spend time researching investor’s thesis and reviewing their current portfolio. This is a good way of telling what an investor is comfortable investing in.
At an early stage of a startup, the team is absolutely critical to its success. We put significant emphasis on finding a strong team who can execute their vision.
Experience – It’s much easier for an investor to bet on someone who has success in the past with a startup or in the industry. If you do not have experience, make up for it with demonstrated hustle and execution.
Salesmanship – Be sure you can sell an investor your Company’s vision. Be able to succinctly communicate the key components of your business. Your ability to sell an investor on your business is indicative of your ability to sell to customers or attract talented employees.
Lack of a technical lead – We typically look for a strong technical lead that can execute the technical side of the company. It is much more difficult to execute on the technical aspect of your business and be in control of your technology without a strong lead.
Coachability – If investors get the sense that the team is not able to take feedback well that is a red flag for working with the company’s founders in the future.
Not “scrappy” enough – The best founders do a lot with very little. Waiting on money or something else before executing is a red flag to investors.
Large addressable markets reduce risk for investors. We seek markets that are larger than $1B in size with a painful problem needing to be solved.
Undersized market – Typically, investors are looking for a large market. A larger market reduces risk from competition and increase upside for investors. If you are competing in a completely new market, do you best to estimate market size and adoption rates for this new market.
Market growth – Typically, investors are looking to invest in fast growing industries. While this is not always the case, investors are looking for a large and healthy market that is primed for future growth and sustainability.
Competition – Everyone has competition, even if you are disrupting a market. Know the other players better than investors, and prove your differentiation.
Commoditized market – Markets where competition is racing for cost leadership often is high risk to investors. This cost leadership can leave your company undifferentiated and can reduce margins over time.
No potential for exit – Investors are always seeking an exit with a company. Help investors see who will acquire your company and at what stage you think you can be acquired.
We look for companies that are either selling their technology to solve a problem or are substantially leveraging technology to provide their business with rapid scalability, significant efficiencies, and great profitability.
Defensibility – A company should have technology that sets them apart from the competition and is hard to replicate. If you can not build motes with your technology, focus on building other non-technical competitive advantages.
Scalability- The company must be able to scale out and grow quickly; therefore, the technology must be able to keep pace. Investors steer clear of businesses that can’t scale quickly.
MVP (Minimum Viable Product) – Investors, like Florida Funders, do not commonly take on risk proving the thesis of a company. For investors like us, companies should have an MVP that validates the thesis of the company and proves product/market fit.
There are many reasons for passing on a deal, but if a startup can address many of the issues above, it has a much better chance of raising funds. If you have a startup that fits our criteria, I’d be happy to have a conversation regarding your company. Fill out our application here and I’ll be in touch!