Lost? Confused? Frustrated? Navigating the investment landscape as a new tech startup can be daunting. Securing funding isn’t just about having a great idea - it's also about understanding what an investor values most. While valuating startups is often considered more of an art than a science, most investors do look for a core set of criteria when assessing a startup’s potential. Knowing and deliberately addressing these can significantly improve your chances of securing the investment you need.
This guide is designed to help you. It’s not an exhaustive checklist or a rigid set of requirements, but rather a practical overview of what investors typically consider when evaluating tech startups.
Qualities of an investible tech startup
1. Solves a strong customer pain point
According to CB Insights, the number one reason startups fail is a lack of market need. It’s important not only that the business solves a customer pain point, but a strong pain point at that. Measured on a scale of 1-10, where 10 represents a severe issue and 1 a minor inconvenience, aim for a score of 8 or higher. Accurately identifying and validating this level of need, however, can be difficult.
This matters because customers are far more willing to pay for solutions that solve critical issues. If your product is a “nice-to-have”, your marketing costs may be very high for very few sign-ups. This can drive up your customer acquisition cost (CAC), which is one of the most important metrics for tech businesses. If your CAC is too high, you may find it harder to convince investors about the viability of your business model.
2. Strong barriers to entry
Institutional investors are usually making decisions about where to invest someone else’s money, whether from pension funds, investment funds, the public purse or high-net-worth individuals. That’s why they look for business ideas that make it hard for competitors to enter and succeed in the same market.
Barriers to entry can take many forms, such as brand awareness, a ‘sticky’ customer base (your customers are unlikely to switch providers), intellectual property, or proprietary technology. Investors want to see a clear and sustainable reason how and why your business will remain protected over time.
3. Aligned management team
This is perhaps the most crucial part of any startup, because a great team matters more than a great idea. Investors prefer backing a strong team with a modest concept than a revolutionary idea without the right execution.
When building your team, consider these three key questions:
Do we have the in-house skills and experience to deliver??
Are our industry connections strong enough to unlock our full potential?
Are we all aligned and committed to being on this journey?
4. Innovation
Not every idea can be the next Uber, Airbnb, or Facebook, but it should at least have the potential to stand out. Copying existing models (often known as “me too” businesses) might generate some revenue but are often less likely to excite investors looking for high growth potential. Investors are looking for new, innovative ideas that change the way we live for the better.
Of course, your product also needs to be able to do “what it says on the tin.” Bold claims that aren’t backed up by evidence will quickly fall apart under some light due diligence.
Much like recruiters screening CVs, investors review hundreds of business plans and pitches every year. Anything that seems off or exaggerated will stand out immediately. It’s better to under-promise and over-deliver - that’s what keeps investors confident and convinced.
5. Technology Readiness Level (TRL) 7 or above
The TRL scale was developed by NASA as a standard framework for evaluating the maturity of technological developments. While different organisations may adapt the scale slightly, the core concept remains the same. TRLs are especially useful for evaluating tech-heavy or university spin-outs that are difficult for non-specialists to understand.
Most equity investors struggle to fund technologies below TRL 7 due to limited visibility on whether the product will ever reach the market. Projects at these stages often require substantial and unpredictable funding, which may put investors off. Grant funding is usually recommended for projects in the early TRL stages.
6. Large market
As a guideline, most innovative startups look to secure 1% - 5% of a given market over a five-year period. If you’re looking to capture 2% of a £100 million market, for example, then it means your maximum annual revenues can only be £2 million. If you’re raising £500,000 in your first funding round, the economics simply won’t work as investors won’t be able to generate an attractive return.
When calculating your market size, it’s important to work out your Total Addressable Market (TAM), and not just the overall market. For instance, if you’re selling a product in Europe but there are potential customers in Japan, will you realistically be able to sell your product in Japan? If so, how much will it cost to build brand awareness in these new territories? It’s often best to focus on a market that’s close to home.
Investors may not always agree with your assumptions about your TAM, but as long as you back up your figures with logic and research, it will help to show that you understand who your target audience really is.
7. Low competition
If you can’t find any competitors, that might be a red flag for investors. A little competition is healthy and can validate that there is demand for what you’re doing andcan even raise awareness in the market, which may benefit your own sales.
Unless your idea is a completely new innovation which is truly disruptive, mature markets are generally not attractive as it is difficult for a startup to compete with the large incumbents.
This is equally true of sectors in their infancy where your competitors are very well funded. If you’re seeking £500,000 equity and your competitors have already raised £50 million, it might be a good idea to consider alternative options.
In summary, you generally need to be ahead of the curve and have entered the market at the same time or slightly ahead of your competitors.
8. Sustained competitive advantage
Often called your “unfair advantage.” You need to give investors a reason why they should be backing your business over anyone else. Why will you win in the current market? Looking to the future, will you still be better than the competition? Often a source of competitive advantage in year one quickly disappears and then you might end up trying to compete on price (otherwise known as a “race to the bottom”) for a reason.
In the modern world of tech startups, “first-mover advantage” is no longer considered a source of competitive advantage and in fact a “fast-follower” position has often proven superior.
9. Show market traction
The best person to provide intelligence on your company is your customers. This is why most investors want some form of demonstration that the market will purchase your product or service. Revenue is desirable but there are other ways to demonstrate traction.
10. Sector-experienced co-investment
Investors rarely want to go it alone and value being able to share risk with others. In an ideal world, a co-investor would be a sector expert with strong industry connections and be able to take an active board seat in the company.
11. Appropriate valuation and raise
Valuing a startup is difficult without historical financial data on which to base the numbers, and different investors use different methods.
If you’re a pre-revenue business in the UK, a pre-money valuation above £1 million can undermine your chance of raising funding from angel investors who are extremely important at the early stages.
Business schools often advise raising enough money to last 12-18 months and expect to sell roughly 15% – 30% of equity in each funding round. That means by the time you exit, you ideally still own around 15% - 30% of the equity, depending on how large the company becomes. This gives you a ballpark idea of what your valuation should be. If the numbers don’t quite add up, consider revising your cash burn and take a leaner approach until you can justify a higher valuation.
Read our guide to startup valuation to learn more.
12. Realistic financial projections
Investors expect to see growth but an overly optimistic “hockey- stick” style projection can backfire. The financials need to be realistic and achievable. There’s no point in painting an overly optimistic picture. It’s unlikely to impress and could set you up for failure the next time you look to try to secure funding. Always go with something conservative and if you must, show a blue-sky scenario to illustrate the potential of the business keep it separate from the main plan..
Creating early-stage financials may feel a bit like trying to predict the future. The best way to look at the exercise is to break it down into the various components. Costs are predictable so start there. Unit economics are straightforward to construct and follow – for example, if you buy widgets for £5, process them for £2 and sell them for £12, your profit per unit is £5 (£12 - £5 - £2). Then you can calculate your customer acquisition cost and the lifetime value (LTV) of each customer. These simple exercises will help you better understand your business and lend credibility to your business plan.
13. Attractive sector
Not all sectors appeal to investors in the same way. Some sectors, such as property and construction, are resistant to change and have long sales cycles but are asset rich which means lower risk. Others like cryptocurrency carry high volatility and risk.
Ask yourself whether your sector is growing, is it innovating and are investors active in the space.
14. Robust business model
Your pricing strategy and revenue model needs to be realistic while still producing attractive margins. Models relying on advertising are typically not investable because it usually costs more to acquire a customer than you can extract from them.
A good test of your business’ viability is charging your potential customers as early as possible. Yes, you could monetise later but often by that stage companies find out that their customers are unwilling to pay or that they’ve built the wrong product.
Charging your customers full price is the only way to know if your business is sustainable. Over recent years there have been examples of VC backed meal delivery startups that offered discounted rates. In several instances, once funding started running low the businesses were forced to pass the full costs onto the customer. Customers then stopped buying altogether as the offering was only attractive below a certain price point and the businesses collapsed. Don’t make that mistake.
15. Clear exit strategy
Real potential exit opportunities are arguably the most important criteria that investors consider. This is especially true with early-stage venture investors because they’re unlikely to have their capital returned via dividends. Therefore, the priority is usually to sell the company. This needs to be realistically achievable within a five to seven year timeframe.
It's good to research what acquisitions have been occurring in the industry, who is buying and at what price. This is usually a multiple of revenue ooftware as a Service (SAAS) businesses usually attract higher multiples of revenue, especially if the business can demonstrate very high growth.
Doing your homework here will likely add credibility to your proposal and probably help you understand the sector far better.
Conclusion
Building an investable startup involves many moving parts, and the landscape is constantly evolving. There’s no such thing as perfect information - but if you can give investors 90% confidence, they’ll take a calculated risk on the remaining 10%.
Remember, investors aren’t just funding providers - they become long-term partners in your business. Treat investment as the beginning of a relationship and choose wisely from the start.
