What are some ways of identifying the perfect startup investment?
Let’s take a look at 8 key aspects of the “ideal” startup. Most startups will not meet all 8 criteria, but they should at least fulfill half of them, if not more, to be considered a sound investment.
- Consumer Need: The most important aspect of any startup is whether a resulting product or service will sell or solve a particular problem. A slick business plan and charismatic founders will help, but the bottom line is that if the product does not sell and generate revenue, it is useless to you as an investor. Of course no product or service is a sure thing, but what is certain is that only those which fulfill a consumer need have any chance of making it. Does the startup offer something people genuinely want? Will it solve some need which is not already being met? If the answer is yes, then there is a chance that such a startup could prove successful when finally launched.
- Exit Strategy: Does a startup have a clear exit strategy in place? In other words, does the business have a definitive timetable or pathway towards returning an investor’s money alongside an agreed portion of generated revenue? It’s important that you as an investor know how you are going to make your money back with a suggested timetable in place. Without this there is little point providing financing because there is no direction or plan to help you generate returns.
- Clear Ownership: As an investor you must have a comprehensive understanding of who owns the startup and all of its intellectual properties. If there is any question regarding patents, copyright, or ownership of assets then investment should be withheld until those issues are legally settled. If they are not then your investment could prove worthless.
- Management: Depending on how “hands-on” you wish to be as an investor, having a reliable and astute management team in place to oversee a startup is essential. Without this, such a project cannot thrive, operate efficiently, or meet its goals on time. In some cases a new management team can be brought in as part of an investment deal, but founders often prefer to keep their existing talented team in place. Some startup founders have great ideas and big dreams, but if they lack the administrative talents to make them happen, you as an investor could pay a hefty price.
- Sustainability: Some startups by their very nature may be “flash-in-the-pan.” In some circumstances this might still prove to be a solid investment should there be a swift exit strategy in place, but ideally a startup should be able to demonstrate that it can be sustainable; a brand which will generate profits for many years. If the startup cannot demonstrate sustainability, then there won’t be many investors willing to purchase that equity from you, at least not in a way which will maximize profits. Alternatively, if the startup is sustainable, then it could act as a consistent source of revenue for you throughout the years.
- Standout: Unless uniquely innovative, the chances are a startup will have competitors. These could already be operating or trying to launch into a new niche at the same time. A startup must therefore demonstrate why it stands out from the crowd; showing why it will dominate other similar companies within that niche. If the startup cannot separate themselves, then it may not be wise to invest in such a project.
- Relationship: Startup founders must be willing to work with investors and be communicative at all times. A project might have a great idea at its heart, but any working or financial relationship which may become fiery, destructive, or stressful, may not be worth investing in. There has to be a mutual respect between founders and investors, each knowing their role in the startup and willing to build constructive relationships throughout.
- Expertise: If a startup is the product of an accelerator program, incubator group, or can access the advice of market experts, it is on sound footing. This knowledge can be used as a safety net, providing peace of mind for investors knowing that advisers with the relevant expertise and skill-set are available to help steer the startup in the right direction.
As stated above, most startups won’t possess all of these facets,, but a strong combination of a few of them can produce an excellent investment opportunity.