An Investors New Best Friend: How to Validate New Business Investments

As the world gets smaller, the stream of opportunities that are available to us seems to grow bigger. With the growth and development of business investment platforms, countless solutions for business investors looking for business investment opportunities are seemingly at their fingertips.

As you’ll soon see, business investors really have their work cut out for them. The most effective solution to identify and validate business investment opportunities is to make data-driven decisions, and the best way to do that is using an AI-powered tool that can streamline the process and help investors make fast - and smart - decisions.

However, are all these solutions made the same? And what do business investors really look for when choosing investment opportunities? Let’s first take a look at how the main types of business investors decide which companies will be their future business investment opportunities, and then show you how a data-driven tool can make all the difference.

How do business investors choose investment opportunities?

As you may well know, there are different types of business investors that startups can rely on for help getting off the ground. This includes venture capitalists (VCs), angel investors, peer-to-peer lenders, private equity firms, banks, personal investors, and so on. Each type of investor has a different investment strategy and expectations, which means they have varying criteria when it comes to choosing business investment opportunities.

Of course, most of the general criteria are along similar lines - does the startup have solid management, an air-tight business plan, an innovative product, and a big enough market? In any case, because the go-to investors for most startups are VCs and angel investors, we’ll focus on their vetting process in this article.

Venture Capitalists 

Venture capitalists are generally a part of private equity firms that use money pooled from multiple investors and give it to startups offering products with high growth potential and commercial value in exchange for shares. The main incentive of VCs is the possible profit that the company could generate over time.

[Related Article - Top 100 Venture Capitalists in Europe]

Where there’s a high risk, there’s also high potential on return - and that’s the game for venture capitalists. While it’s easy to determine what mature company to invest in, as its management and success are already tried and true, there’s also less room for profit. The drawback with startups, on the other hand, is that they are a lot more difficult to assess in the early stages.

How does a VC decide which startups are great business investment opportunities? What makes a VC tick, i.e. what makes a VC take out their checkbook and invest millions into a brand-new startup?

You might not be surprised that it’s not groping in the dark or just going on gut feeling. The roadmap to becoming a successful company does have several milestones that VCs look for, so let’s see what they are.

Management

Being able to present a solid business plan to a VC is very important, as it indicates that a capable managing team is running things. Promising, well-prepared management is a key metric that top VC firms will look for when choosing their future business investment opportunities.

This means that VCs look into the experience and background of members in various executive positions in a startup. Knowing that an executive has experience successfully taking other businesses off the ground is an indicator that this startup also has a good chance for success.

Innovation opportunities: the product

Innovation is key when it comes to choosing the right business investment opportunities. VCs, angel investors, and private equity firms all look for a service or product that shows great promise in the long run. They look for a startup that has an edge over the competition and provides real-world solutions.

A big source of innovation today is the need for sustainable solutions to global problems, and a lot of startups are coming up with technologies that address precisely this. That’s why looking at ESG investment metrics, for instance, has become a big part of determining how promising a startup’s product is in broader environmental, social, and governance contexts.

Market potential

The market potential, i.e. size of the market is another factor VCs consider when choosing business investment opportunities. Generally, VCs invest in startups with a large target group, and expect executives to provide business plans for the company’s growth to show how and when they’re expected to reach certain financial goals.

And with the growing market potential of startups developing sustainable technologies and solutions, it’s little wonder why VCs have been turning to alternative screening methods for potential investments, such as ESG.

Risk assessment

Let’s talk about cryptocurrencies for a second. People entering the crypto scene today are perhaps flabbergasted to find Bitcoin’s price has skyrocketed to some $60,000 at the time of writing. In a way, although still volatile, Bitcoin is an already well-established cryptocurrency, so, at present, it just doesn’t seem like the most lucrative business opportunity. Instead, crypto-investors may prefer to find a cryptocurrency with a smaller market cap. 

Why? Because it’ll have far more potential to increase returns. But what if they invest a lot of money in a new cryptocurrency, and then the coin flops?

A VC has to estimate the risk of each startup as if it’s a newly introduced cryptocurrency. Does the product seem to have a future and their needed use-cases? Could it cause any legal problems? What sort of profit could they hope to generate? And how expensive would the initial investment be?

Interestingly enough, utilizing ESG metrics can help investors mitigate risk when identifying new businesses investment opportunities. Why? Because the foci of ESG - the environmental, social, and governance contexts - can also reveal how a product could survive, thrive in, and contribute to the real world.

Angel Investors

Angel investors are people, usually private equity professionals with a high net worth, that lend startups money under very favorable conditions in their early stages of development in exchange for shares. Unlike VCs, angel investors usually invest their own funds. As these types of business investments make up a very small percentage of an angel investor’s portfolio (around 10%). They’re not as interested in the possible profits from the investment as they are interested in helping the entrepreneur get their business idea off the ground. In a lot of ways, angel investors are the opposite of VCs.

Some metrics that angel investors consider before choosing business investments opportunities are similar to those of VCs. For instance, angel investors will also observe the management team and founder(s) of a startup, though except for experience, they’d also look at things like the team’s drive and passion to really go the distance with the product they’re pitching. 

The beginning of any project, let alone one that’s time and resource-intensive, can be quite trying. So, the team behind the startup needs to be determined and ready to survive all the trials and tribulations of the early stages.

Other factors that are similar to those of VCs and other types of business investors, in general, include market size, product potential, and risk assessment. Let’s take a look at a few additional factors that angel investors consider when considering investment opportunities.

Early traction of the company

Media buzz, pilot customers, a beta product, and strategic partnerships are some examples of early traction that indicate that a company has promise. Think of it as a blend of the strategies of the tortoise and the hare: angel investors want the determination of the tortoise to finish the race, but some of the hare’s confidence in the early stages won’t hurt either.

Financials and other key metrics

We already talked about business plans being important if a startup wants to show they mean, well, business. In this sort of plan, an angel investor will want to see various KPIs (key performance indicators) such as projected growth in revenue and a schedule of profit goals, gross margin, gross revenues, and gross expenses, burn rates, customer lifetime value, acquisition cost, etc.

Referrals

Reputation is important when it comes to getting investments. If the startup “showrunners” are individuals that have been recommended to the angel investor by colleagues or friends, they’re more likely to get picked up for a round of funding.

Innovative technologies

Innovation opportunities are both the key to successful businesses and the future. They help create solutions, they help businesses mitigate risk, they help identify market gaps, and they ensure the long-term success of a business by tackling operational challenges.

On one hand, innovative technologies mean finding different and new ways to be increasingly sustainable. But also, for investors, they mean building businesses that are different, that have a competitive advantage, and propose long-term solutions to long-standing problems.

Data-driven software to identify new business investment opportunities

As you can see, there is a lot at play for investors. However, investigating each factor in detail to decide whether a startup is “worth” a fat cheque is quite a time-intensive process. What business investors need is a way to expedite the process, a method that, in any case, won’t sacrifice quality in return for speed.

This is where data-driven software can really help. A platform like Valuer is a powerful tool that helps investors discern business investment opportunities that precisely match their needs and expectations.

Valuer’s massive database holds all sorts of information on new and more mature startups from all over the globe. We also provide business investors with invaluable insights into companies, overviews of companies, and even quantifying quality by assigning each startup a score based on the Valuer scoring system.

So, Valuer doesn’t just give users a long list of innovative startups - it provides insights and analytics, rather than raw data, that would help business investors make faster and smarter decisions. This is because business investors aren’t only given an overview of the product - as we already saw, the product is only one of the many factors that the top VC firms, angel investors, and private equity professionals consider when looking for investment opportunities. Rather, Valuer gives investors an overview of all the relevant aspects of a company that fit their search criteria. 

All that stuff we talked about that investors look for in a startup? Well, it can all be found in Valuer’s well of insights, including the target market, company maturity, growth potential, product, etc. How does it all work? Let’s take a look.

AI

Valuer is an AI-driven investment platform. What does this mean? It means that unlike non-AI investment platforms, where existing algorithms pose a limit to functionality, our AI is always learning, adapting, and improving the ways it interacts with the giant database at its disposal to essentially provide users with tailored-made results to their searches. The AI-driven platform can draw conclusions, offer up data insights and analytics, and customize your overall experience.

Find look-alikes

If there are existing companies that business investors are interested in and have already worked with, or wish to find a similar company to, they could easily do that with the help of Valuer’s look-alikes search feature. All you have to do is type in the name of the company you are familiar with and the AI will generate a list of companies that match it.

This is really useful for business investors that are either focused on a specific niche or looking for innovative, cutting-edge technology that has the potential to come out on top of the competition.

Find innovative opportunities and specific technologies

In line with focusing on a particular technology, Valuer’s AI can help you search for technologies that fall within a certain industry or deal with a certain problem. So for instance, if you were to type in “sustainability,” you’d get access to the various industries where startups are coming up with new technological solutions to sustainable issues. From there, you could direct your focus on things like food production, energy, or software, etc.

You can also get an overview of any industry through a cluster. The cluster maps an overview of an industry by plotting companies that exist within its various sub-industry. This shows the interconnectedness of companies throughout the industry and helps investors identify growing trends and companies with growth potential.

Valuer score

Our AI assigns a score of 1 to 100 to each startup in the database, a sort of overall score that’s based on the accumulation of various factors. This helps investors see how a startup ranks in its niche but also allows them to get a quick overview of various factors that have contributed to the final score.

Some of the metrics that are used to determine the Valuer score include a company’s maturity, growth potential, sustainability, innovation, and performance up to that point. Investors also get to see how a startup compares to other similar companies, i.e. competitors, to evaluate their potential place and role in the market. As you can see, most of the criteria that business investors really care about are readily available through simple Valuer searches.

The Valuer score, paired with the various useful insights and forecasts that the Valuer tool provides, can really help business investors find opportunities based on the criteria they care about and the goals they have when they’re choosing where to invest.

The best method?

There are various ways different types of investors use to validate and screen their potential investment opportunities. As we see more comprehensive types of screening, such as ESG, are gaining steam because they offer something more to investors. 

The more versatile and reliable a tool or criteria can be the more effective and efficient it can be for investors universally. We see that data-driven processes hold the most potential because numbers don’t lie. 

What the Valuer platform then offers is a data-driven process that is powered by AI to make sure your results are reliable, robust, and efficient. The features you can find on the platform covers  exactly what you need when you're looking for the next big investment opportunity and offers a one-stop innovation and investment hub for companies and investors alike. We think that the platform can become an investors new best friend and an integral tool for future investments.