If you’re thinking about investing in a tech startup, how can you tell upfront if it has a better chance than most of being a success?
By ‘success’, I mean one that manages to catch on, scale and create 10+ times the valuation after the point you invest.
There is no certain formula, of course. Companies have done amazingly well, perhaps from hopeless situations, sometimes in spite of themselves, while others do not work despite having a great team, huge market opportunity and perfect timing.
If we all knew what was going to work, and what was not, then we’d all the billionaires kite surfing in the Caribbean with Sir Richard Branson.
However, in my experience, in having been a startup founder (through to a successful exit), having worked for a federal government startup fund for many years and having made a few ‘angel’ investments myself, here’s my ten criteria I look for when assessing a tech startup.
- Superb Founders – with deep, relevant domain experience (they know the industry), coachable (they listen and take on advice), they have a history of entrepreneurial ventures (maybe a few failures, that’s fine, it’s all learning), and a good mix of tech and sales expertise;
- Huge addressable market – large global TAM to go after (TAM = total addressable market), with a strong growth trend in their favour (the potential market is only getting bigger);
- Clear customer problem and value – the team has identified and can solve a large customer problem and/or create gains for the customer, who are willing to pay for this, and there’s evidence this is already happening (‘traction‘);
- Competitive landscape mapped – ‘we don’t have competitors’ is a big no-no; the team must have a clear idea of where they sit in the market, who their main threats are, and how to differentiate and protect themselves (they have a ‘USP’, or unique selling proposition, or ‘unfair advantage’);
- Protectable IP/tech edge – the startup has some innovation they own or have exclusive unique access to, which is protected, and they can wield to their benefit;
- Timing – very important; if the race is already won, they’re too late; being early is tough, but not as bad as being too late. Is the market ready for this innovation? Where’s the evidence that it is?
- Plans and Goals – what are they wanting to do? where are they going? how realistic are their plans? what will the investment allow them to do? where will it get them?
- Risks and gaps – what can go wrong? where are the gaps in the team? how resilient are they? why will this team win? how can the potential downsides be avoided or alleviated?
- Other shareholders – who are the other investors/shareholders? Do you want to be in business with them? What’s the quality of the board, mentors, advisers? If it all goes pear-shaped, how can you get out?
- Opportunity for 10x – every investor wants a 10-times return on their investment, and they have to be patient (it can take 5-7 years); what opportunities and likelihood is a 10x return with this company?
Not every criterion should necessarily be weighted the same. If you were to push me, then I’d say superb, coachable founders, large market, traction and timing would probably be the most important.
However, for a complete assessment, you should look at all ten criteria, and make judgements as to how strong they are in each. Perhaps you could score them out of 10 for each, creating a score out of 100. Or you could give more marks for those you thought more important, such as team or timing, and score them out of 15, and others out of 5, whichever way you look at it.
Whatever you do, try not to get too excited about any particular startup, or any one aspect of the company. Keep it unemotional.
It’s easy to buy things; anyone with money can buy things. So be ruthless in your assessment. You may look at 10 or 20 before you invest in one. Or perhaps the first one you see is THE one.
Whatever you do, keep reassessing how you assess them, and learn how to do it better. There is no perfect system.
Once you do invest, give that team all the support, advice and mentorship you can, and that they need and want. Add value to the company, open doors. Stay away when needed, give them space, and come on in and help when required.