What investors look for in early-stage startup investments

Published on
October 18, 2021
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Right by your side, right from the start.

We always say to startup founders that it’s never too early to talk to us. That’s because many of our investments are the first cheques founders have taken for their business. And we also like to have a chance to get to know each other. We pride ourselves on being true partners right from the beginning, often before you’ve got your business model figured out. In some cases, we’ve invested before the company even exists, waiting until they file company incorporation docs and open a bank account before we can transfer the funds!

We partner early and have the firepower to support startups as they scale.

If you’re a founder looking for funding in the very early stages, you’re familiar with the challenge of pitching something that doesn’t tangibly exist yet. So what can you do to show investors that your idea has potential?

In the absence of a significant number of customers, data points or a product that’s ready to go, investors look at qualitative factors. Investors are betting on you and your team, an idea you have to solve a problem within a specific market, and your vision for the product or service.

It all starts with a compelling story that’ll make us believe in what you’re doing, and evangelise customers and employees down the track. Here’s a list of ideas to get you started. At AirTree, we don’t expect you’ll have all of this ready to go — so pick and choose from the below the parts that best reflect where you’re at on the journey.

Team

We love a story with an audacious and unrelenting protagonist — that’s you, the founder. We want to see:

  • Your authentic connection to the problem you’re solving. If it’s something that has impacted you personally — tell us. We want to get to know who you are as a person too.
  • A healthy obsession for what you’re working on that will equip you with the resilience for the journey ahead, without losing faith in your vision or burning out in the process.
  • You know the market inside out and have a vision for its future.
  • A balance of IQ & EQ.
Founder-market fit is an inherent, unfair advantage that distinguishes founders from their competition. In the case of Delegate Connect, Jordan and Jacob’s 15+ years of hands-on experience in events management meant that they’ve lived and breathed the problems that their customers face. This authentic connection to the problem they’re solving ultimately gave us conviction that they’re the best people to enable the future of events.
Richard Lin — Investor

Introduce your team — and don’t leave this until the end. A kickass team reflects your ability to execute on your vision and is a good proxy for attracting great talent who will help you do that. You can talk about:

  • The role each team member plays
  • The diverse skill sets within the team
  • Their unique industry insights

Market

Let’s look at the setting of your story — your market. Highlight why this market will allow your company to grow quickly and is growing at a rate that means more and more people will have the problem you’re solving.
There are 2 types of markets we get excited about at AirTree:

  • A huge market that is ripe for transformation
  • A nascent market on the cusp of becoming huge
Coming out of COVID, it felt like consumer behaviour around QR codes and mobile payments in restaurants and bars changed overnight. Kim and Adrian at Mr Yum were agile enough to take advantage of this rapid shift in consumer behaviour — and suddenly, their product was nearly ubiquitous in Australia. But it wasn’t just about moving fast — they had the right product-focused DNA to stay ahead of competition and constantly had the customer in mind.
James Cameron — Partner

If you’re going after an existing market, it’s helpful to talk about how you are disrupting and transforming the market in a way that means customers could never go back to the way things were before.

If you’re going after an emerging market, explain the new paradigm emerging and why your customers need your solution in this new era.

Timing is everything. So, why now? Your market may be at a tipping point because:

  • A previously niche market is shifting from small to significant
  • The technology that enables your product is on the cusp of a transition
  • There are emerging economies of scale that are changing what’s adopted in the mainstream
  • User behaviour and cultural norms are changing
  • There are macroeconomic or regulatory triggers

Whether you’re going up against incumbents, other startups building in the same space or another product with an overlapping use case, startups face competition from day one. A competitive analysis and demonstrating you understand the competition is a given, but we love to see you obsessing over customers, not the competition. Focus on how you solve the customer’s problem better than anyone else.

After you’ve explained how you’ll solve this problem, we want to know why customer’s need this problem solved. Good problems to solve are urgent, cost a lot of money, are mandatory and are encountered repeatedly. The problem you’re solving doesn’t need to cover all of these aspects, but if it doesn’t cover one of them, it’s unlikely that your company will grow or customers will be excited about it.

Traction

Finally, how is your story progressing so far? Give investors a window into your world of what’s working, what’s not, and what you’ve learnt along the way.

How do you do this? Meet potential investors you’re interested in working with early. You may not be raising capital just yet — that’s fine, but bring us along for the ride, right from the start. A bunch of low-key interactions over time creates many data points, demonstrating your progress and achievements (e.g. new hires, pilot customers, feature innovations), ultimately forming a pattern that represents your traction. This isn’t about proving you’re 10X’ing it MoM. But it does go a long way in building the relationship.

We first came to know Mike years ago first as the co-founder of Sonar6 and subsequently through his advisory work with up and coming Kiwi startups. When Mike mentioned he was considering teaming up with his brother Philip to launch Joyous, a new software company in the HR space, we were excited. We workshopped the product roadmap with Mike over multiple meetings, even getting down to individual wire-frames and mockups. We ended up investing before a line of code had been written.
John Henderson — Partner

If you’re going to investors saying you have a finished product that you’re certain customers will love, alarm bells start ringing. Getting to product-market fit usually requires a series of experiments and iterations and sometimes even complete pivots. You don’t need to have all the answers figured out yet, but ideas of the steps you’ll take to get there are great to see.

A proof of concept is not always necessary, but very helpful to show. It’s a practical proof point of the vision in your mind, its ability to solve the problem you want it to and the functionalities it could have. Explaining how you’ve used it to test a hypothesis or idea and shipped a new version of the product due to what you’ve learnt is a persuasive way to demonstrate your team’s hands-on execution skills.

There isn’t an expectation that you’ll have many, if any, paying customers at this point. Customers can, however, play a role in helping investors understand the potential of the opportunity. Early signals of customer love like usage, engagement, social posts and emails are great. And organic growth in users that haven’t come from your existing network are a big plus at this stage.

A founder’s ability to learn and see the problem through their customer’s eyes is important. Share what you’ve learnt about your target customer group; did what they tell you change any initial assumptions you had? Point to examples of where you’ve deployed their feedback into the MVP.