Recently I was talking with an entrepreneur that’s looking to raise a Series A round. He’s already raised a small seed round and has good momentum with recurring revenue in the low-to-mid six figures. As we got to talking, the topic of minimizing investor risk came up. Of course, investors want to make a huge return, but they also want to limit their downside.
Here are a few areas of risk minimization investors look for in deals:
- Product-Market Fit – Does the product truly work and have happy, paying customers?
- Repeatable Customer Acquisition Process – Does the team have a business model that’s working whereby it’s clear how an increased investment in sales and marketing will grow the business?
- Management Team – Does the team have relevant experience (sales, marketing, engineering, support, and operations) and a track record of executing well together?
- Unit Economics – Does the cost of customer acquisition relative to the lifetime gross margin of the customer make sense?
- Path to Profitability – If the market or fundraising climate turns south, is there a clear route to making the business profitable and sustainable?
Naturally, there’s no way for investors to minimize all the risk. Entrepreneurs would do well to address these areas when talking to investors and make them feel comfortable with the risks.
What else? What are some other ways for entrepreneurs to minimize investor risks?