Best Practices for Setting Your Startup Up for Success with Investors

Today is an exciting time to start your own business. The capital available to startups has tripled in recent years, and there are many investors eager to invest.

Despite this surge in capital, many seed-stage startups struggle to attract potential investors. Why? Because they often don’t know what venture capitalists (VCs) look for in a startup and what criteria VCs consider before making an investment.

Moreover, many entrepreneurs make critical mistakes in the process of seeking and dealing with venture capitalists. In this guide, we'll break down what investors want and provide practical, actionable advice to set your startup up for success.

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What Do VCs Look For in a Startup?

When evaluating a startup, VCs look at many factors beyond just financial metrics like recurring revenue and audience growth. Here are the critical components that investors consider when deciding whether to invest.

1. Technology or Product

The core of what VCs want to see is a strong product or technology that has the potential to be profitable. It’s not enough to have a great product—it must also have clear market potential.

• Competition: Investors want to know how much competition exists and how well-capitalized those competitors are. It’s crucial to show that your product has a high barrier to entry. This helps position your company as a unique player in a competitive market.

• Intellectual Property (IP): Owning IP rights to your product is critical. If someone else can easily replicate and sell what you have created, that’s money out of your pocket. Having strong IP protection helps ensure your profitability.

2. Company Structure

Investors have a preference for C-corporations. Why?

• Ease of Investment: C-corporations allow for easier investment and transferring of interest. They are also subject to more structured requirements and transparency, making it easier for investors to track financials.

• Investor-Friendly Features: Pass-through entities like LLCs and partnerships often carry liabilities and tax obligations that could trickle down to investors, which is unattractive to VCs. Additionally, S-corporations can only issue one class of stock, which excludes the option for preferred stocks that VCs often demand.

• Delaware Incorporation: Many investors prefer dealing with companies incorporated in Delaware because of the state’s business-friendly laws. If it makes sense for your business, incorporating in Delaware is worth considering.

3. Management Team

The management team is often just as important as the product itself. Investors want to know that your team has the skills and experience to execute your vision.

• Industry Experience: Investors prefer a management team with experience in the relevant industry. They look for individuals who have a track record of success and the ability to navigate challenges.

• Commitment: Your commitment to the business is also essential. Investors want to see that you’re financially and emotionally invested in the startup—not treating it as a side hustle. Personal investments demonstrate your dedication.

• Team Dynamics: VCs will assess whether the management team works well together. They want to see cohesive, collaborative relationships that can withstand the pressures of a startup environment.

4. Business Model

Your business model is how you plan to make capital grow. Investors want to see that your business model is realistic, scalable, and novel.

• Subscription Revenue: If your business fits into industries like software, media, or fitness services, a subscription revenue model is attractive due to its predictability.

• Concise and Informative: When presenting your business model, keep it clear and concise. Investors need to understand how you connect with consumers and convert them into paying customers quickly. Avoid rambling—get straight to the point.

5. Traction

“Traction” is a key metric for investors. It refers to tangible evidence that your business is growing and gaining momentum.

• Growth Metrics: Show that your product has increasing demand. Highlight metrics like the conversion rate of trial users into paying customers or the growth rate of your customer base.

6. Market Size

Investors want to see a large market opportunity. They are looking for startups that have the potential for substantial growth.

• Market Potential: Make sure you clearly define the size of the market, the number of potential customers, and the demand for your product. Avoid talking about early exits—investors want to see a long-term vision.

7. Capital Requirements

The amount of capital you’re seeking and what you’re willing to give up are critical components for investors.

• Percentage of Equity: Most VCs want a significant equity stake—typically between 20-25%. If you’re asking for a large investment, be prepared for the investor to want significant ownership.

• Accredited Investors: If you’re seeking more than $1 million, you will likely only be able to deal with accredited investors. These are investors who meet specific SEC requirements, and they typically look for larger investments and bigger returns. This may limit your pool of potential investors, but it also opens the door to higher investment amounts.

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Common Mistakes that Drive VCs Away

VCs say “no” far more often than “yes.” Here are some common mistakes that cause investors to lose interest and how to avoid them.

1. Not Understanding the Venture Capital Industry

The first step is understanding the venture capital industry. Not all VCs are looking to invest at the same time, and not all VCs are a fit for your business. VCs have life cycles, and they only invest during specific phases. Moreover, many VCs are industry-specific, so you need to target those who are aligned with your sector.

• Know Your Stage: Some VCs invest in the seed stage, while others focus on late-stage growth. Make sure you’re approaching VCs that match your startup’s current phase.

• Have a Strategy: Don’t wait for investors to come to you. You need a proactive strategy that includes prospecting, following up, and building relationships. Expect the process to take at least six months.

2. Sending Unsolicited Business Plans

VCs typically don’t respond to unsolicited business plans. They prefer to work with entrepreneurs they know or who come recommended by trusted contacts.

• Build Relationships: Use social media platforms like LinkedIn to build an online presence and connect with investors. Create “virtual word of mouth” by sharing insightful posts that demonstrate your expertise.

3. Asking for an NDA

It might seem reasonable to ask investors to sign an NDA, but it’s generally ill-advised. Most VCs refuse to sign NDAs because it exposes them to liability, even for unintentional disclosures.

• Solution: Instead of an NDA, keep your most sensitive information confidential. Provide investors with enough information to gauge their interest without divulging proprietary details.

4. Overloading Your Presentation

When given the opportunity to pitch, keep your presentation concise. VCs will give you about an hour, and having too many slides can be a dealbreaker.

• Stick to the Essentials: Focus on the core aspects of your business—product, market size, traction, team, and business model. Save the details for follow-up discussions if the investor is interested.

5. Worrying Too Much About Dilution

Dilution is inevitable when taking on VC funding. The focus should be on the value added by investors, not just the percentage of equity you give up.

• Focus on Growth: Even if your ownership percentage decreases, the value of your stake can grow significantly if the company’s valuation increases. What’s important is the potential for an increased exit value, not the percentage you own today.

• Don’t Give Up Control: While you might give up equity, be careful not to give away too much control. Retaining decision-making authority is critical to the long-term vision of your business.

6. Making Unrealistic Claims

Investors want to see a realistic picture. Overstating your company’s potential or ignoring risks will lead to skepticism.

• Be Honest: Provide realistic budgets, timelines, and risk assessments. Investors appreciate entrepreneurs who understand both the opportunities and the challenges.

7. Failing the Due Diligence Test

VCs will do their homework, checking your claims about IP, financials, and company structure. Make sure you’re ready.

• Document Checklist: Have all your documentation well-organized, including financial statements, IP filings, corporate documents, and tax records. This shows that you’re prepared and transparent, which helps build investor trust.

Summary and Checklist for Startups

Now that you know what investors are looking for, it’s time to put these insights into action. Here’s a checklist to help you prepare:

1. Solidify Your Product: Ensure you have IP protection and understand your competition.

2. Choose the Right Company Structure: Consider setting up as a Delaware C-corporation.

3. Build a Strong Management Team: Highlight industry experience and commitment.

4. Develop a Scalable Business Model: Make it concise and show clear growth potential.

5. Demonstrate Traction: Highlight growth metrics like user conversion rates.

6. Highlight Market Size: Show the potential for substantial growth.

7. Understand Capital Requirements: Know how much equity you’re willing to give up and align it with your funding needs.

8. Avoid Common Pitfalls: Don’t make mistakes like asking for NDAs, overloading your presentation, or making unrealistic claims.

9. Prepare for Due Diligence: Keep your documents organized and ready for investor review.

By following these best practices, you can make your startup more attractive to investors and increase your chances of securing the funding you need to succeed. Good luck!

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• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

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