We all know that for a successful startup there are nine failures. Investing in startups is not for the faint-hearted and is obvously is not money to be expecting soon. But investing in startups also could be exciting and open doors to new opportunities and the future. But before investing in startups you should check the various dimensions of that startup.
One of the most important components of a startup evaluation is market analysis. Market analysis answers important questions, such as whether the product is ready to enter the market? And does this market have the capacity to receive the product? Naturally, these have to be tested among markets and real customers.
A successful startup identifies the best spot for entering the market, in which barriers to entry are becoming a strong barrier against future competitors. In addition, it can be said that the product is not ready for the market roll out, unless there is a fine tuned marketing plan. This means that for a successful investment, there needs to be a good analysis of the market size, the cost of customer acquisition, and any other important number for the market.
As an investor, you need to make sure that the startup is operating in a big or growing market. The size of the market is just as important as the innovative idea of the startup.
The question is whether the target market has enough money?
The answer to this question depends on your understanding of the market. Obviously, it is not wise to invest in a market where its audience does not have the money to pay in return for that product.
The Business Model
The second most important thing for an investor to evaluate before investing in startups is the business model.
Important questions about the product, what makes this product unique and innovative to its competitors should be asked ans answered. If there is no unique strength, nobody is looking for it. Clever investors are able to identify the first ones, the brilliant products and pioneering innovations.
- Does this product / service solve a real problem? Successful products and services solve the real problems. Investors are looking for the real problem solvers. Also, does this startup have a scale-able business model? Investors want to invest in a business model, not just an idea. The business model should have a sustainable income revenue plan.
- Be sure to assess the current startup scale: Does this startup need real capital? Is there a clear budgeting strategy with a long-term perspective?
- Capital requirements are an important issue to be addressed from the beginning. If a startup requires funding, it is necessary to provide a reasonable budget plan.
- Does funding a startup makes it repeatable and scale-able? Or is there a need for staff to increase relative to the increase of customers?
The Exit Strategy
Is there a compelling exit strategy if needed?
Each investor needs to know how to get the best out of an investment opportunity, and when to get out of the partnership with the least damage. Various forms of exit strategies are defined, but it is important that the startup founders and investors have a point in time in their mind to exit. Most investors usually insist that a well-planned exit strategy must be included in the business plan before investing in startups.
The Human Capital
Check out the human resources strategies and the whole human capital of the startup. The founder’s team must be coherent and focused on customer development and should listen to what customers say. In a successful startup, getting continuous feedback is crucial.
From an investment point of view, the team’s approach is as important as the innovative startup idea and market size.
(To be continued…)