Many founders explore alternative funding paths to manage equity dilution and maintain control over their vision. Crowdfunding platforms, such as StartEngine, offer an opportunity for startups to raise capital from a wide range of supporters.

Our informational guide covers what investors typically look for in startups, the types of investors you may encounter, preparing a compelling pitch, and how crowdfunding platforms can support the fundraising process.

This content is provided for informational purposes only and does not constitute financial, investment, or legal advice. Always consult a professional for guidance tailored to your specific circumstances.

What Investors Look for in Startups

Investors invest in potential. To win them over, you should prove that your startup can be part of their portfolio of successful investments. 

Market Potential

Investors generally consider whether a startup addresses a large and expanding market. High returns may be possible if you’re offering a product or a service that taps into growing demand. Highlight the market size to demonstrate the potential for investment consideration.

Scalability

Solid startups are able to scale efficiently and cost-effectively. Investors may consider your startup more favorably if your business model is built for growth. That is, your expenses stay manageable as your customer base expands. 

Unique Value Proposition (UVP)

Among the first questions aspiring entrepreneurs get asked by potential investors is: “We’ve seen this before—what sets your startup apart?”

The marketplace is crowded, but defining your UVP well is key to demonstrating how your product solves a pressing problem differently—and better—than the competition.

Team Strength

Investors want to see a strong, committed team with the experience, dedication, and integrity to pursue their vision with the vigor to overcome any obstacle.

Types of Startup Investors

Knowing the types of investors you might encounter can help you target your pitch more effectively. Here’s what you’ll come across:

Angel Investors

Angel investors allocate their own capital into early-stage startups in exchange for equity stakes. They seek startups with strong growth potential and are prepared to accept higher risks in exchange for higher returns down the line.

Their extensive experience can be a valuable source of guidance and mentorship during your startup’s formative stages. However, securing funding from them can be challenging, as they are discerning and selective based on their experience and risk assessments.

Venture Capitalists (VCs)

Venture capital firms typically target high-growth companies in need of larger investments. They provide a venture fund in exchange for shares and generally focus on startups with proven traction and scalable business models.

The catch is that, as a business owner, you’re often required to sacrifice some control; the venture capital firm may request seats on the board or input on major decisions.

Equity Crowdfunding Platforms

Crowdfunding platforms like StartEngine, offer startups a way to connect with a broad audience of potential investors, providing flexibility in setting investment terms.*

How to Prepare for Investor Pitching

Your chance to captivate potential investors and convey your startup’s vision lies in an effective investor pitch. Here’s what you need to know:

Elevator Pitch

The elevator pitch is your chance to make a strong first impression in a short, often 30-second or less, punchy summary that encapsulates your startup’s core idea, mission, and value proposition.

Investors should immediately understand what problem your product solves and why it’s needed. Avoid overly technical jargon and keep the pitch clear and concise.

Pitch Deck

The pitch deck is a visual representation of your startup’s potential. It’s composed of elements that speak to the investors’ primary concerns. Key slides should include:

• The problem your startup addresses.
• The product or services it proposes as an effective solution.
• The target market size shows growth potential.
• The business model demonstrates how you’ll make money.
• The team showcases the experience and dedication of your collaborators.
• The financials provide a snapshot of revenue streams, costs, and margins.

Financial Projections

Financial projections demonstrate your startup’s future performance. The objective is to outline realistic revenue and expense forecasts to show investors that your startup is grounded in financial cautiousness and long-term vision. You must cover:

• Expected growth rates,
• Profit margins, and
• Future milestones.

Funding Stages and Strategies

Understanding the different stages of startup funding and the strategies that go with them will help you decide when and how best to approach investors.

Pre-Seed and Seed Funding

Pre-seed and seed funding are the phases in which you lay down the “seeds” of your startup’s growth.

During this phase, most entrepreneurs’ initial investment comes from their personal funds, financial institutions, assets, friends, and family. It funds initial development and covers essential expenses like market research and product development.

If angel investors join at the seed stage, the capital, expertise, and valuable connections they may offer can support your startup’s growth.

Similarly, resorting to crowdfunding platforms like StartEngine can provide you with access to a large pool of public investors and supporters who can be directly invested in your business’ success.

The end goal of the pre-seed and seed funding is to refine your product and achieve that initial traction. 

Series A, B, and Beyond 

Once your startup gains traction and proves its product-market fit, you’ll have to consider expanding operations, optimizing product offerings, and growing the customer base.

Often, VC firms become heavily involved, and investors take on larger stakes to scale the company rapidly.

• Series A: Investor funds are allocated to scaling and refining the business model. Once you prove the concept and gain some early customers, Series A funding ($2–$15 million) can help expand sales, marketing, or feature development.
• Series B: Once a startup needs more funding to expand, Series B funding ($7–$30 million) helps it scale even further, perhaps by entering new markets or increasing production capacity.
• Series C and Beyond: Capital sought in Series C and beyond ($30–$100 million) has the goal of taking the business to the next level, such as through developing new products, acquiring a competitor, or preparing for a future initial public offering.
   

Common Mistakes to Avoid When Pitching Investors

Overestimating Market Size

Many startups try to amaze investors by projecting a massive total market size without showing a realistic view of their actual target market.

Your potential market certainly doesn’t include everyone in a broad industry. Narrow it down to who would realistically use or pay for your product. Otherwise, you’ll be projecting a lack of understanding or overconfidence that investors regard as a bad sign.

Provide evidence of market research and your understanding of the specific target market that aligns with your product or service. Explain your serviceable available market (SAM) and serviceable obtainable market (SOM) to give investors a realistic view of your growth potential.

Lack of Clarity in the Business Model

If you can’t clearly explain how your product or service will generate revenue, investors will doubt your ability to execute the model.

Simplify and clarify it. Outline how you plan to generate revenue by describing your pricing strategy, sales channels, and target customer base. Highlighting how you plan to scale your startup’s operations and increase profitability will make it easier for investors to envision its success.

Insufficient Preparation

Most beginner entrepreneurs step into industries they have minimal knowledge in and stand in front of panels, insufficiently prepared to answer questions about their business plan.

Before you pitch to investors, prepare a polished pitch deck and ensure you’re able to answer questions about your:

• Competitors
• Estimated Valuation
• Business strategy
• Financial forecasts
• Customer acquisition and retention strategies
• Industry trends
• Operational challenges

If you can prove that you’ve done your homework by engaging in in-depth discussions about your startup’s potential for success, you’ll present yourself more confidently and potentially increase investor interest.

*Raising capital is subject to eligibility and regulatory approval. Past performance does not guarantee future results

Ready to Raise Capital on StartEngine?

About StartEngine: StartEngine is one of the largest equity crowdfunding platforms in the U.S., helping private companies raise capital from the general public. The platform provides founders the opportunity to market their brand and build an army of brand ambassadors — all while raising capital on terms they set. To date, StartEngine has helped more than 1,000 founders raise over $1.3B* from a community of over 1.8M**.

*Raise amount as of October 15, 2024,  which includes funding rounds completed on StartEngine and SeedInvest, which StartEngine acquired the assets of. See additional information here
**Community count determined as number of unique email addresses in StartEngine’s database as of August 27, 2024. Unique email addresses do not necessarily mean unique individuals or active users.