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Evaluating Early-Stage Startup Potential: An Investors Take

Plenty of investors burned their fingers during the dotcom bubble, and now it goes without saying that evaluating early-stage startup potential has to be a data-driven process.

Every new venture needs money to scale, hire talent, develop product/technology or mass produce the products. While most start-ups are newly founded companies with little track record to show when they go for early-stage funding, they are the outcome of years of planning, research, strategizing and effort. However, as an investor there is a lot of you have consider before backing a concept or an idea that you connect with.

Every investment is an information-driven decision. You won’t be putting money into a venture just because it is aiming a sunshine industry. Plenty of investors burned their fingers during the dotcom bubble, and now it goes without saying that evaluating early-stage startup potential has to be a data-driven process.

It is always said that probing and questioning is the best way to gain knowledge. That’s exactly what investors usually do with early-stage start-ups. Some key points that they look out for include:

Credentials/skills of the founders

The experience or expertise that a founding team brings to the table is very important. Typically, past track record of startup success or having excelled in the field as a corporate executive is a good indicator of a founder’s capabilities. However, it is not a ground-rule as a lot of investors back fresh talent that has the right vision and aptitude to learn or pivot to achieve growth.

Equation between the founders

A great team can make an average idea work, whereas a not-so-adept team can squander even a path-breaking idea. Investors seek people who are not only sound in technology, but also display traits such as adaptability, passion for the project and a strong rapport among them. They should also be able to resolve disputes quickly and amicably without causing any disruption to the growth plans.

Return on Investment

Another crucial factor is return on investment expected. In a bid to attract investors, many startup founders over-promise on this account and when they fail to deliver, things go downhill rapidly. The key is to know what you can do and when. Overpromising might make you get that first dose, but without the booster, you won’t go far.

Competition mapping

Competition is seen as a key indicator of business potential since it clearly proves that the company is in a viable market.It is important to look at the competition, the USPs of the startup and its potential for growth in a holistic manner.

Technology and talent acquisition strategies

Every single startup out there would state that funding will be used to acquire/upgrade technology and hire the right talent. However, investors are usually keen to know how the

startup will achieve that objective. What is the recruitment strategy and the detailed plan regarding technology that is needed and where is the company planning to procure it from?

The mission and vision

Every company is established to earn profits, but the mission and vision of the founders is supreme. If a team is aiming to disrupt the market by creating something that will be extremely useful and superior to solutions on offer or address an unresolved demand then it is a great idea. However, if the founders are obsessed with earning money quickly then it is a red flag.

There are various other aspects that investors focus on such as cultural and environmental impact of a startup. Since investors are likely to get several pitches from players belonging to the same industry or from startups targeting a similar audience and growth strategy it is advisable to have clear answers to the following questions before approaching investors

  • What is the problem that you are trying to solve?
  • Why would customers buy whatever product or service that you are offering?
  • Is it something that has been done before successfully/others have failed at?
  • If it is a novel offering then what is the scalability and how far do you plan to take it?

Source: Business World

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