Although a lot has happened on the market, start-up investing is still going strong. But something fundamental has changed. A great idea, solid team and bold vision might not be enough anymore. Read further and find out what is the main criteria investors are looking for in digital start-ups in 2022.

What is a digital start-up?

Before going into investment criteria, let’s establish what is a digital start-up. In the beginning of the millennia, it was easier to separate digitally aided business from a traditional one. Today, the digitalization has swept through like wildfire forcing even the most traditional businesses to modernize their business.

There are many views on how to define what is a digital startup, but one that sticks out is digital maturity. Digital maturity tells how profoundly digitality is in the core business use. This definition also enables to view various types of companies as digital. For example, an ecommerce store or a platform business that enables scaling of traditional services quickly. Let’s say that a digital start-up is company that uses digitality in their core business model enabling it to scale up faster.

Start-up investment landscape in 2022

A lot has changed within just few years. Two to three years ago (even one in some cases) start-up valuations were often very high. Currently the market is going through a phase where investment criteria has shifted towards a different kind of direction. Good companies still get funded, but the shift has resulted in what investors are searching for in a digital startup.

Just to make it clear how big is the current shift, here’s how the valuations of publicly traded companies have acted recently: Meta -69%, Netflix -56% and Google -37%. Combined that’s 190 billion dollars less in market value. The stock market can change to another direction quickly, but the same trend can be seen with unlisted companies.

Main Criteria Investors Are Looking for in Digital Start-Ups

The market is diverse, so there are a lot of different views on start-up investing, but some trends can be lately spotted. The first trend is the emphasis on traction instead of future expectations. A few years ago, a good team, story and business idea could result in a high valuation, but today investors seek proof. If you can show an ability to generate traction with a capital efficiency, it raises your odds to get funded. In another words, the skill of bootstrapping is even more valued than maybe before.

Another important criterion is – and has always been – a unique (preferably defendable) and scalable business model. By just opening a Shopify account to sell children’s clothes does not cut it anymore. Anyone can do that in a matter of minutes. Most likely you will have to invest in building a unique digital heart system using a tailored software development or composable business practices.

A third (evergreen) criterion is the team. There are a lot of arguments about whether the idea or team should come first, but there’s a little argument that execution makes the different. People and company culture makes a difference no matter how digital the start-up is.

A recipe for a Digital Start-Up to get funded

One might argue that the digital start-up bubble has somewhat burst, just opening an ecom store or building an app might not cut it anymore. Design your business uniquely and try to build moats. Focus on getting traction, best would be to get actual paying customers, but it that is not possible find another concrete way to show proof.

Also, it might be a good idea to evaluate the valuation you are targeting for. Currently valuations can be 2-4 times lower (based on actual start-up pitches). This does not mean that you can’t get a high valuation, it means that this is what you are up against. Start-up investing is a risky business, so if there are similar kind of opportunities with significantly lower valuations, that is tempting from an investor perspective.

Build a modern, hybrid-era, company culture and nurture it. Make sure core team is committed and be radically transparent towards your team and investors especially on your hardships. Everybody loves wins, but in real life, scaling a start-up is a constant struggle with massive headaches. Being transparent builds trust and it translates to help from the people around you.

Lastly, do not take no for an answer. If you are committed to get funded, you will. Best of luck!

Teemu Malinen
Digital entrepreneur & Investor
Sofokus Group