What Investors Look for When Buying a Tech Startup

Securing funds from an investor is a huge milestone for any tech startup. To increase your chances of being noticed and chosen, you need to know precisely what they’re looking for and how you should adapt.

Do You Need to Adapt Your Startup?

Even if you think your product is innovative and will be incredibly successful, investors need more to go on than passion and drive. After all, nearly 67% of startups never achieve positive returns. If you want to be the one they choose to fund, you should really pay attention to what buyers are looking for and adapt accordingly.

What Investors Dislike in a Tech Startup

If investors view your tech startup as too big of a risk, they’ll be much less likely to purchase it.

An Overreliance on Investors

While a high valuation is an incredible accomplishment, it doesn’t guarantee future stability or safeguard future investments. If investors believe you’re relying too much on temporary funding to offset outstanding debt and expenditures, they might view the purchase as a risk.

Excess Debt and Expenditures

If you’re like most tech startups, you have company debt. Although it’s a normal part of entrepreneurship, it can be a pain point for investors. Typically, substantial outstanding dues are incredibly significant to investors when your business model isn’t profitable or has low growth potential. The bigger the financial risk, the less likely they’ll take interest in you.

When looking at your debts, they’ll also consider your burn rate — your monthly expenditures before you generate revenue independently — to see how much runway you have. In other words, they want to know how much time you have left before your funding dries up. For startups, an acceptable burn rate is six to 12 months on average. To calculate yours, divide your total capital by your monthly operating expenses. Investors might consider you too risky if you have fewer than six months left of operation.

Unclear Business Growth

Investors will only be interested in buying your tech startup if you have measurable, accurate figures to show them. If they don’t know your key performance indicators, average expenditures, and baselines, then they can’t project your success — and may view the purchase as too risky.

Barriers to Market Entry

Where are you at in bringing your product to market? Have you secured patents and acquired customers? Even if your concept is innovative and promising, investors will want to see proof of concept before buying.

The Technology Readiness Levels are a baseline tech startups can use to assess their technology’s maturity and potential. Typically, investors will be wary of anything under a seven — a working model — because they’d be purchasing a startup for its prototype. If you haven’t entered the market yet, you’re a risky investment.

Lack of Industry Experience

In the tech sector, experience is everything. Investors will be much less inclined to buy your startup if they don’t view you as informed or competent. A lack of industry knowledge proves you’re unfamiliar with the market and its risks.

What Investors Prefer in a Tech Startup

If you want to be more appealing to investors looking to buy a tech startup, you must prove your competency, competitiveness, and scalability.

Scalability

Before buying startups, the number one thing investors look for is scalability. Even if you already possess stable revenue and a loyal customer base, they need to know you can increase your market share and outperform the competition.

If your niche is large or competitive, a smaller market share is acceptable. As long as you have a high valuation and strong financial projections, investors will be willing to overlook a shallow revenue stream.

Innovation

There’s a good chance your startup isn’t revolutionary. Realistically, you’re not the next Netflix or Facebook. However, you don’t need to reinvent your niche — you only need to shake things up. Buyers look for innovation because it guarantees a large market share and a customer base.

Many artificial intelligence startups generate billions of dollars annually because they entered the market before the technology became big. Even though the niche is oversaturated now, the original few were impactful enough to leave an impression.

Market Appeal

You need to have a strong market appeal to lure investors. In other words, your product or service must offer a solution to a significant consumer pain point. When buyers acquire a startup, they want to know it will have a loyal, resilient customer base.

Competitive Advantages

You’ve probably figured out how fierce competition is in the tech industry by now. That said, investors will want measurable figures rather than personal anecdotes. You’ll appeal to them if you conduct a market analysis to gauge your competitors.

Usually, investors want to know your strategy for distinguishing yourself from the competition. Also, they look for solid competitive advantages. If your product isn’t easily replicable and not already on the market, purchasing your startup will be much more attractive to them.

Exit Strategy

A pre-prepared exit strategy shows you’re realistic and knowledgeable. According to a Harvard Business Review survey, around 70% of founders spend minimal or no time planning for when they leave. If you want to make yourself appealing to investors looking to purchase your startup, you need this plan.

Even if you expect your exit to happen a specific way, prepare for all other possible contingencies. Readying a comprehensive strategy in advance alleviates stress and makes you look more competent to buyers.

Increase Your Odds of Securing Funds

Having the business sense to restrategize in order to attract investors is a smart move. If you can prove your startup stands out and has the data-based projections to prove it, you’ll have a much better chance at securing funds.