What Early-Stage Investors Look for Before Funding a Startup

To get an investor interested in a startup, you need much more than a promising idea. Early-stage investors often make decisions before a company has a long financial history, a large customer base, or a fully proven business model.

That makes the investment decision more nuanced. Investors need to determine whether the founder can execute, whether the problem is worth solving, and whether the opportunity could become large enough to justify the risk. The strongest startups give investors enough evidence to believe there is something valuable to build, even when the outcome is still uncertain. Let’s discuss in detail what investors see before funding a startup.

The Founder Matters as Much as the Idea

A compelling idea can attract attention, but the person building it has a major influence on whether an investor decides to proceed.

Early-stage companies rarely follow their original plans perfectly. Customers change their requirements, products evolve, competitors appear, and assumptions turn out to be wrong. Investors therefore need confidence that the founder can respond without losing sight of the larger opportunity.

Some qualities investors may look for include:

• Deep knowledge of the problem or industry
• A clear reason for building the company
• The ability to attract strong employees and partners
• Comfort with changing course when evidence demands it
• A realistic understanding of the company’s weaknesses

Founder-market fit can be particularly important. Someone who has spent years dealing with a problem may recognize an opportunity that others miss.

A Problem With Real Economic Value

Investors need to see more than an interesting problem. They want to know if solving it can create a valuable business.

A founder should be able to explain who experiences the problem, how often it occurs, what the problem costs customers, and what they currently do to deal with it.

Customer behavior can provide stronger evidence than market research alone. Paying customers, pilot agreements, repeat usage, strong engagement, or customers actively requesting a solution can all indicate that the problem has commercial weight.

A startup does not need thousands of customers before approaching investors. It needs evidence appropriate to its stage.

A Market Large Enough to Support Growth

Even an excellent product can become a limited business if the potential customer base is too small.

Investors therefore consider the size and direction of the market. They may ask:

• How many potential customers exist?
• Is demand growing?
• Are customer behaviors changing?
• Is technology opening a new opportunity?
• Can the company expand into related markets?

Founders should be careful with oversized market projections that have little connection to the actual business. A credible path from a focused initial market to a larger opportunity is more useful than an enormous TAM figure with no clear route to reaching it.

Evidence of Progress

Early-stage investors understand that startups are works in progress. They will not expect a company with six months of operating history to have the same metrics as a business that has been selling for several years.

The evidence investors consider can change as the startup develops.

At the earliest stage, this could include:

• Customer interviews
• A working prototype
• Pilot commitments
• Early users
• Initial revenue
• Evidence that customers are willing to pay

As the company grows, investors may pay closer attention to:

• Revenue growth
• Customer retention
• Gross margins
• Customer acquisition costs
• Sales conversion
• Recurring revenue
• Expansion within existing accounts

The important question is not simply how impressive the numbers look. Investors want to understand what those numbers say about demand and the company’s ability to grow.

A Reason the Business Can Win

Competition is inevitable in most attractive markets. Investors need to understand why a startup has a realistic chance of building a strong position.

A competitive advantage can take many forms:

• Proprietary technology
• Exclusive partnerships
• Strong distribution
• Specialized expertise
• Proprietary data
• Network effects
• A trusted brand
• Deep customer relationships

An early-stage company may not have a fully developed moat yet. Investors can still look for signs that its advantages could become stronger as the business scales.

The founder should also be able to answer a straightforward question: If this company succeeds, what will make it difficult for another company to copy that success?

A Clear Plan for the Investment

A founder asking for $2 million should be able to explain why $2 million is needed and what changes after the money arrives.

That could mean:

• Hiring a technical team
• Completing product development
• Expanding into a new market
• Building sales capacity
• Increasing production
• Reaching a specific revenue milestone

A strong funding plan connects capital to measurable progress. It also gives investors a clearer idea of what the next stage of the company could look like.

The Ability to Think Beyond the Pitch

An investor’s work does not end when the presentation does.

Due diligence can involve examining financial information, customer data, competitive positioning, legal matters, ownership structure, and the assumptions behind the company’s projections. The purpose is to establish whether the opportunity presented in the pitch matches the underlying business.

Founders should expect questions that go deeper than their slides. They should know their numbers, understand their competitors, and be prepared to explain both the strengths and weaknesses of their company.

That level of preparation can also reveal something important about the founder: how they think when they do not have a rehearsed answer.

What Michael Schwab’s Approach Shows

The best early-stage investment decisions often require investors to recognize potential before it becomes obvious to everyone else.

Big Sky Partners’ investment in Figure AI provides a useful example. In 2023, Michael Schwab and Brian Spitz recognized the potential of Figure AI’s humanoid robotics concept and invested in the company. Big Sky later increased its investment as Figure continued developing its technology.

The example illustrates an important part of early-stage investing. Investors sometimes have to assess an ambitious idea before its commercial outcome is fully established. That requires examining the people involved, the problem being addressed, the technology, the size of the opportunity, and the company’s potential to develop into something much larger.

That perspective is central to Michael B. Schwab’s approach to early-stage investing, where the people behind ambitious ideas play an important role in deciding which opportunities deserve a closer look.

What Makes a Startup Investable?

There is no single metric that guarantees funding.

A startup becomes more compelling when several pieces reinforce one another. The founder understands the problem. Customers have a reason to care. The market has room to expand. The company has evidence of progress. Its competitive position can strengthen over time. The requested capital has a clear purpose.

Investors are taking a risk precisely because an early-stage company is not fully proven. Founders cannot eliminate that uncertainty, but they can make the opportunity easier to evaluate.

The goal is therefore to show investors a credible business, a capable person or team behind it, and a clear reason to believe the company can become significantly more valuable as it grows.