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The Product
Is the startup offering a solution to a real problem, or is it a problem looking for a solution? Do they have the market research to back their claims? Does the product provide an exponentially better solution to the alternatives out there? If the answer is no – and the golden rule is that the improvement should be 10x - you can get away with 2x or 3x but the product will be a very hard sell and the company will have to spend inefficient sums of money to convince customers to switch.
Of course, there are startups that will be creating a completely NEW market, but even for these kinds of products, you will have to consider market opportunity from the get-go.
Finally – and this is something that most startups will NOT have - does the product have a potential for virality?
The Team
The founding team is usually the most important variable to look at when investing in a product.
What kind of dominant expertise does each member of the founding team have? Are they experts in the field they are building their startups in, who have built a solution to problems they know well or are they new entrants who are making educated guesses? There are arguments in favor of both. If you’re an outsider you will be able to see things with a different perspective but I would be wary of any startup that doesn’t have at least one of its founders from the industry it wants to engage with.
What is the skill set of the founding team? Do they have a mix of product, sales, marketing, financial skills? If not (or if it is a sole founder with knowledge only in a few of these sectors) do they have a strong network of advisors who make up for it?
Do they share the same goals for their product and business? Once it hits the real world, things will move very fast, and if the founding team’s goals aren’t well aligned, then trust will break down and the team can fall apart.
Are the members of the founding team equal or quasi-equal owners of the company? If their share ownership is very skewed, this could cause issues later on.
Vision
It’s not enough to have a great product, you also need to know your customers. Too often, startup founders focus on their vision for their product but forget that the customer is the building block for any successful business.
Most startups should start with ONE solution to ONE problem. Those that try to do everything at once usually end up doing nothing at all, as they will be spreading their limited resources too thin on the ground. However, they should have a vision for growth beyond their startup needs, or they will never build up enough barriers against their competitors. Let’s not forget that Amazon started off selling books, but Jeff Bezos had the vision to grow it into what it is today.
Finally, no startup can succeed without a plan B… and C and D. There will be adversity and quite simply new information along the way, and a successful startup is one that is not afraid to take on that new information and improve its product off the back of it.
Business Plan
First of all, before you even go into the merits of the business plan, you should be able to determine at a glance if it is well structured and well thought out. Discard those that aren’t. Ideas that don’t translate into good business usually produce business plans with massive holes in them, that the founders then try to creatively patch up, making the business plan unduly convoluted and hard to understand.
The founding team may have the right vision for growth, but have they planned for it? Does the business plan realistically account for the funds necessary to execute this growth? This is particularly important at the seed stage. As we have seen, this is when the revenue run rate starts to become important, and many startups are crippled because they just don’t have enough funds to hit their milestones. In the startup space, fast growth is always better as it is the one thing that will protect the business from the competition.
Traction
At MVP stage, you should at least be seeing a willingness to buy. In the absence of revenue caused by the absence of money to build the product, the founding team should have sounded their potential customers and vetted their interest in the product. Letters of intent are ideal for a B2B startup. For a B2C model, get potential customer interviews.
Once the product has launched, you should be seeing substantial month on month and year on year growth. There are really no excuses to not show growth when you are starting from zero. If revenues don’t grow once the startup has the money it was after, it means nobody wants its product, or that it miscalculated how much would need to go into launch. Both are bad.
You should look at cash burn to date – how quickly did the startup go through its money versus what it had planned for? Next, go back to the business plan and look at its forecasted cash burn rate. Does it make sense? Will the company have enough runway (I recommend 18 to 24 months) on its current plan until the next raise? Are they on track to meet their revenue targets for the next raise by the time they run out of cash?
Exit Strategy
Exit can happen in one of three way: IPO, trade sale, or private equity acquisition.
No startup can predict, in its pre-seed and seed stages, if any of these things will happen to it, and if you see a business plan that ends with a statement that the company will IPO in 5 years at a 100 m GBP valuation, you are well entitled to laugh.
You should make sure that the startup you are investing in is putting itself in the position to potentially be so unique and valuable that its peers will want to buy it, private equity will want to own it, and stock market investors will want shares in it if it goes public.
Investor Fit
Some startups might just be after money, but that is the wrong approach. Startups should also be approaching investors that are the right fit for that company. This fit comes in two major categories, which are NOT mutually exclusive.
The first, sectoral fit, means that an investor operates in a space that is the same, or similar to, the one that the startup operates in or aspires to operate in. So, for example, a proptech startup would benefit from investors in the real estate space.
On the other hand, there is investor fit. Early stage angel investors should be willing to provide the small sums the startup requires whilst giving it as much support as it can expect from investors participating in larger rounds later on. In later rounds, the angel investor should be willing to provide the same level of support for a much smaller % share of the business (even though their ticket size might be larger!). In the best case scenario, the angel investor will be able to continue betting on the company as it grows, all the way through to series A.
