4 Tests Your Startup Must Pass to Win Capital

My interviews aimed at better envisioning the future of business strategy reveal a big challenge: it’s too difficult for CEOs to persuade the right people with money to invest in their companies.

Leaders struggle with many questions:

  • Can they find investors who can best help them realize their vision?
  • If so, what is the best way to frame their business strategy to persuade them to invest? 
  • If not, how should they change their business strategy to attract capital?

Leaders can answer these questions in a way that streamlines the capital-raising process if they can pass four tests. Below, I describe the tests and present examples from recent interviews I’ve conducted.

1. Does the company have a compelling mission and ambitious goals?

It’s become a cliché to point out that the best employees want to work for a company that aims to change the world in a meaningful way. Investors want to place their capital with leaders who strive to turn that mission into a very large company that can go public and keep growing fast.

NYC-based Zoomin–targeting a $17 billion market opportunity–has such a mission. It wants to give software users a better experience by replacing technical manuals with easier-to-access answers. CEO Gal Oron told me February 2 that he “fell in love” with Zoomin’s product focus because “it’s boring–meaning there’s less innovation, and every company needs it.”

2. Have you made clear choices about which customers to serve and what products to sell them?

To build a large company, leaders must aim at very large market opportunities–likely to be worth many billions of dollars. And they must start by making clear choices about which customer groups to target and what products they will offer these customers. 

While it might not be apparent at the beginning, the most compelling companies for investors are also able to build longer-term growth trajectories by targeting new groups of customers, expanding into new geographies, and adding new products that their existing customers are eager to buy.

One company that is clearly aiming big is Windward, a Tel Aviv-based predictive intelligence company that is applying AI to transform global maritime trade. As Ami Daniel explained in a January 26 interview, Windward is targeting the $12 trillion market for shipping on the world’s seas with a predictive intelligence service that gives users the ability to make better decisions by tracking maritime cargo flow and risk factors in real time.

Windward’s capital raising strategy follows a key principle: Find investors who share your vision. Windward has raised nearly $39 million, according to Globes. Most recently, in 2018, it raised $16.5 million from investors who understood the value that its service provides to insurance companies and cargo shippers.

3. Is your value proposition irresistible to customers?

Before your company’s long-term strategies will resonate with potential investors, you must win new customers by providing a product or service that customers can’t resist. As I wrote in November, to do this, you must listen to customers and give them more value–benefits they crave for the money–than rivals do. 

Growth can come from offering a product with a clear return on investment. A case in point is Herzliya, Israel-based Namogoo–its name is from the Hebrew word for vanish–which provides a service that helps boost its clients’ revenue by preventing their customers from being “hijacked” before they complete their purchase. As CEO Chemi Katz explained in a January 28 interview, Namogoo–which has raised $69 million, according to Crunchbase–has grown at 200% to 300% a year over the last three years because it helps its clients increase their revenues and retain more customers.

4. Do you get better at delivering value as you grow?

The final test you must pass to raise capital is to design your operations so that your company can lower its costs and enhance the customer experience as it gets bigger–which in Scaling Your Startup I called Building a Scalable Business Model. Investors want to bet on leaders who can create and sustain competitive advantage–and improving as you scale is essential to hitting that bullseye.

Zoomin–which raised $21 million last December–is doing this through a “flywheel.” As Oron explained, “We give users better answers which means they have a better experience. That leads to more traffic and more insights–resulting in even better answers.” The result is greater customer satisfaction and a higher net promoter score. 

If you can pass these four tests, investors will flock to your door.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.