Investors choose startups through a funnel: from dozens of incoming projects they drop most at first glance, meet a few and run full due diligence on only one or two.
The main criteria are the team, market, product and traction, business model and unit economics, deal terms and the path to exit.
Before investing, they check legal standing, finances, the product and the people.
Startups look like an exciting field for investment: potentially high returns, new technologies, innovative solutions.
But finding a startup worth backing is hard — and not only because of risk: the quality of projects is often questionable.
Founders, in turn, do not understand why investors walk past their “great idea”.
Below: why it is hard for investors to choose, how selection works, which criteria are used, how due diligence is done and what to consider when investing in a Spanish company.
For founders, it is a chance to see their project through an investor’s eyes.
Why it is hard for investors to find good projects
Plenty of ideas, few ready projects
The startup world is full of ideas, and many founders approach investors with a concept they believe in. But an idea is not a project.
Investors need projects that have been developed, have a clear business model and are ready for the market.
Most startups never reach scale or profitability, so investors prefer businesses with proven revenue potential.
How to turn an idea into an investment product: How to prepare a project for investment.
Founders unwilling to risk their own
One of the key signals for an investor is whether the founder will put in their own money and take on risk.
If not, the investor sees a lack of confidence or an unwillingness to share risk.
Founders often shift responsibility for the project onto the investor and refuse to share risk in any form — money, personal involvement or commitments.
But investors look for partners, not people waiting for a gift. What counts as founder commitment: Founder skin in the game.
Weak preparation
- No clear concept: the founder cannot say what the product will be. For the investor, the project is too uncertain.
- No market or demand research: the founder is sure the product is needed but cannot prove it. Investors want to see who will buy and how big the market is.
- A vague roadmap: without a plan it is unclear how the startup will reach its goals. “It will work out” is not a plan.
- Errors in the financial model: gross mistakes and unjustified assumptions show the investor a hope for luck rather than a worked-out project.
Some founders offer intermediaries high fees for raising money, hoping to skip working on the project. For a serious investor that signals the project is not ready.
Legal unreadiness and no offer
Many startups look for money without having secured their intellectual property, without contracts with key people and sometimes without a clear company structure.
Often there is no clear offer either: how much money is needed, what it is for and on what terms. Without that, investors cannot see how to work with the project.
How to build an offer: Investor offer with no collateral and a low pre-money.
Overvalued ideas and weak teams
Founders often overvalue their contribution of an idea and early work and undervalue the team. But investors look not just at the product but at the people who will build it.
A weak or inexperienced team is one of the most common causes of startup failure in analysts’ post-mortems and one of the main reasons for rejection.
Fraud risk
Fraud in startups remains a real problem, and high-profile cases breed distrust even of honest projects.
Investors have to be cautious, and honest teams have to overcome heightened scepticism.
The best answer is transparency: verifiable numbers, an open data room, documents that agree with each other.
How investors select startups: the deal funnel
- Deal flow. Projects come through introductions, angel networks, accelerators, platforms and events. A referral from an investor or founder they know counts for more than a cold email.
- Screening. Deck, short email, website. One question: does the project fit the strategy — sector, stage, cheque size, geography — and is there something worth a meeting?
- First meeting. Testing the team and the logic: do the founders understand the market, customer and economics, and are they honest about risks? How to prepare: Investor negotiations.
- Deep dive. Financial model, metrics, customer calls, conversations with industry experts.
- Term sheet. Main terms: valuation, amount, instrument, rights.
- Due diligence — legal, financial, product and team.
- Closing — agreements, capital increase, money transferred.
Startup evaluation criteria
| Criterion | What investors look at | Warning sign |
|---|---|---|
| Team | Sector experience, key roles filled, history of working together, personal commitment | A lone founder lacking key skills, conflicts, equal splits with no logic |
| Market | Size, growth, reachable segment, competitors | “No competitors”, a market sized top-down |
| Product and traction | MVP, paying customers, retention, growth | Only an idea or prototype, friends’ feedback instead of payments |
| Business model and unit economics | How it makes money, CAC, LTV, margin, customer payback | The economics don’t work even on paper |
| Financial model | Justified assumptions, scenarios, use of funds and which milestone they reach | Numbers in the model and deck don’t match |
| Deal terms | Valuation, instrument, rights, cap table | An unjustified high valuation, a messy cap table |
| Exit | Who could buy the company, the path to later rounds | No idea how the investor will get their money back |
How to show product and traction: Startup MVP and What is startup traction; how to calculate the economics: Startup unit economics.
Due diligence checklist before investing
| Area | What to check |
|---|---|
| Legal | Company registration, articles, cap table, shareholders’ agreement, IP owned by the company, contracts with key people, disputes and claims |
| Financial | Accounts, bank statements against claimed revenue, debts, taxes and social security paid, monthly burn and runway |
| Commercial | Customer contracts, calls with 2–3 customers, sales funnel, revenue concentration in one customer |
| Product | Does the product work as claimed, technical debt, dependence on contractors |
| Team | References, past projects, founders’ involvement and stakes, vesting |
If you are investing in a Spanish company
- Registration and articles — an extract from the Registro Mercantil: members, directors, capital, encumbrances.
- Accounts — annual accounts (cuentas anuales) filed with the registry; for a company that has not yet filed, internal accounts and bank statements.
- Taxes and social security — certificates showing no debts to the tax agency (AEAT) and social security.
- IP rights — assignment agreements to the company, trademark and patent registrations with the OEPM.
- Shareholders’ agreement (pacto de socios) — founder vesting, investor rights, exit rules.
- Investor tax relief. An individual can deduct 50% of the amount invested in the capital of a new or recently created SL or SA from personal income tax, on a base of up to €100,000 a year (art. 68.1 of the Income Tax Act). Main conditions: shares acquired at incorporation or in a capital increase within 5 years of incorporation (7 for an empresa emergente); the company’s own funds at the start of the year of purchase no more than €400,000; the company carries on a real business rather than managing assets; the investor holds the shares for more than 3 and less than 12 years; their stake together with their spouse and close relatives no more than 40%. Decide on the relief with a tax adviser.
How the deal itself is structured: How to structure startup investment in Spain.
An opportunity for founders
Everything that makes choosing hard for investors is an opportunity for founders.
A project with proven demand, clear economics, secured rights, team commitment and a clear offer stands out from most.
Go through the criteria table and the due diligence checklist yourself before the meeting: every line you close removes a reason to say no. The Express Startup Readiness Checklist helps you assess readiness quickly.
Frequently asked questions
How do investors choose startups?
Through a funnel: deal flow, screening against their strategy, a meeting with the team, a deep dive into the model and metrics, a term sheet, due diligence and closing. Most projects drop out at each stage.
Which criteria matter most when evaluating a startup?
The team, market, product and traction, business model and unit economics, the quality of the financial model, deal terms and a clear path to exit. At early stages, the team and evidence of demand weigh most.
What is startup due diligence?
The check before investing: legal (company, capital, IP rights, contracts), financial (accounts, debts, taxes), commercial (customers, sales), product and team.
Why do investors reject startups?
Most often because the project is not ready: no proven demand, a weak team, model errors, no founder commitment, legal unreadiness or no clear offer with deal terms.
Are there tax incentives for investing in a Spanish startup?
Yes. An individual can deduct 50% of the amount invested in the capital of a new or recently created company from personal income tax, on a base of up to €100,000 a year (art. 68.1 of the Income Tax Act), subject to the law’s conditions on the company, holding period and stake size.
Key points on choosing a startup through an investor’s eyes
- Investors select projects through a funnel, and most drop out at first glance.
- The main criteria are team, market, product and traction, economics, deal terms and exit.
- Rejections are more often about project readiness than the idea itself.
- Before investing, investors check legal standing, finances, customers, product and team.
- In Spain, an individual investor can claim a 50% income tax deduction if the law’s conditions are met.
Sources
- Ley 35/2006 on Personal Income Tax — art. 68.1.
