Startups have the potential to be massive earners for an investor. Getting in on the ground floor enables investors to make the most out of a startup’s innovations. However, not all startups are successful. Quite a large number of them seem to have good ideas but fail to implement them properly.
When one examines successful startups, however, a few shared elements become apparent. Smart investors know what those elements are and how to determine if a startup has that potential for massive growth. Seven members of Young Entrepreneur Council delve into the critical aspects investors should keep an eye out for when prospecting startups, and how these elements affect their decision to invest.
1. Team, Product And Purpose
Look for a good team, product and purpose. Overall, what’s the idea and how is it executed? Is there a roadmap and what’s the team’s attitude? How do they handle social and what is the problem being solved? How are the decks made? How are their white papers and homepages? What about their blog or content in general? Also, look at their churn rate, blueprints and GitHub repositories. It usually takes but minutes to differentiate between startups you want to invest in and those you can ignore. For the former, I go through the criteria mentioned above and reach out to the few that are still left standing after these questions. Of those that got back to me with good answers, all received funding if a good deal for both sides was possible. It’s a win-win for communication. – Joey Bertschler, dorfnetz.li
2. Founding Team’s Experience And Skills
If you are looking at an early stage company, it is really important to look at the founding team. Have they worked together before? Do they have relevant experience? Do they have the skills needed to get the company to the next stage? The second most important thing is the business plan. It’s not necessary that the business is totally unique as most good ideas have been done before, but the idea has to be good and the strategy has to be sound. How is the startup going to stand out? What competitive advantages do they have over others who are doing similar business? Competition isn’t necessarily a bad thing—the market just needs to have sufficient demand and the offerings need some differentiation. Later stage startups have more metrics you can review and track to competitors in the market. – Elizabeth Braman, JoyHub
3. The Founder’s Commitment
It has to be all about the founder. On numerous occasions, I have met with founders to go over their number and understand where the investment will be spent and quickly realize they have a $250,000 salary earmarked for themselves. If the founders are not 100% committed, then why should I be as an investor? It is not that you want your founders to be on the bread line or to have to use food stamps, but you do not want to disincentivize them from what should be the goal of growing the business. It is also important to make sure that your founders can listen while holding a strong vision. You do not want them to be a pushover who takes advice from anyone that offers it and, at the same time, you do not want them to be egotistical. – Alastair Sanderson, LFA Machines DFW LLC
4. An Unfair Advantage
Do they have an unfair advantage? I like to stack the odds in my favor as an investor. For instance, Casamigos wasn’t successful because they had George Clooney; they were successful because one of their investors owned high-end bars and clubs around the world and mandated Casamigos be put in all of them. They were able to garner immediate distribution to the highest levels of people, and then tell the story of George and Randy as founders while immediate sales could fund massive marketing campaigns. The secret to viral companies and startups is usually that they had an unfair advantage, not necessarily a better product. – Codie Sanchez, Contrarian Thinking & Entourage Effect Capital
5. How The Investment Can Strengthen Your Own
Angel investors usually focus on a combination of strategy, product, market size and team to screen investments. Undoubtedly, those are all important, but as a three-time founder in hospitality tech, I often assess how making an investment in another company can help strengthen my own. I love investing in hospitality, food and fintech-related deals with founding teams or co-investors that can add value to my own venture down the road. If an investment has the possibility of generating extrinsic value, it’s worth much more to me. I’ve even invested in companies whose chances of success I thought were limited in order to get a foot in the door with the people involved. Ironically, one such deal yielded my strongest financial return to date. – Andrew Pietra, Qorum Inc.
6. A Large Exit Plan
Does the startup have a large exit plan? I recently spoke with a startup that told me their goal was not to have an exit, but to work on things that they enjoy. I love that plan as a founder myself, but not as an investor. Investors generally only have a tiny piece of the pie (which tends to get smaller and smaller over time), so the potential not just for an exit but a substantial one must be there for the numbers to add up. There are many companies that are successful and profitable, but are not a fit for investors who need a huge exit in order to get a return. – Laura Roeder, Paperbell
7. A Guarantee You’ll Get Your Money Back
I typically look for a guarantee that I’ll get my money back. In order to do this I require a confession of judgment clause in my repayment agreement. A confession of judgment states that the borrower accepts the liability and damages that were agreed on. It also allows you to circumvent normal court proceedings and avoid a lengthy/costly legal process to resolve a dispute. It’s best to have this agreed upon and in writing when everyone is happy and thinking clearly. This clause has ensured that I have always gotten my money back on every company that I’ve invested in. If someone seeking investment won’t agree, I don’t invest. There are a lot of serial startups and people out there that have no skin in the game of paying you back or not. This will help you realize who is for real and who’s not! – Bill Mulholland, ARC Relocation
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