Investing In The Right Startups
Shark Tank has been a long time favorite of mine (and pretty much any kid that had a TV.) The excitement of the pitch, the questions after, and the potential deal looming in the air was enough to make you cheer for your favorite underdog. The startup culture across the world has been supported by the movement of Angel Investors. Essentially, angels can be wealthy individuals, industry experts or even an angel group consisting of a large amount of angels that may come together for a joint investment.
With the popularity of crowdfunding, your neighbor down the block or a total stranger could potentially become a financial backer. As investing in businesses becomes more like investing in stocks, having some guidelines for investment isn’t a bad place to start. But, how do you evaluate businesses that aren’t even in the same realm? If they are private businesses, how do you find information that you need to make this kind of decision? I’m going to walk you through 5 criteria for investment that I personally use.
The first is founder investment. Is the founder invested financially and operationally into their venture? I’m always surprised by the few founders who have managed to startup without a dime of their own money. If they don’t have skin in the game, they don’t have skin to lose. And if they don’t have skin to lose, they will have less of a problem to lose yours.
The second is the number of founders. The ideal spot is 2 - 4 founders. A one-man show can be difficult to execute on all of the tasks and milestones that they need to in order to scale. However, teams with a large amount of founders can often have too many cooks in the kitchen. If there’s too many decision-makers, the likelihood of the team in conflict increases and the decisions can be weary. In essence, in order to lead the team, some of the team needs to be followers.
The third is a large total addressable market. When you’re investing into a business, you want to see that they are scalable. Can they expand this business to other parts of the country? Can they expand the business to other parts of the world? As an investor, your greatest return on investment would likely be from an IPO.
The fourth is to avoid high rounds. The truth is to just get in early. Your dollar will go farther, your return will likely be higher but your risk is also inflated. Choose whatever strategy is best for you individually but the higher the round, the less return you will make.
The fifth is post-revenue or a history of experienced and proven entrepreneurs. If the entrepreneur or the founding team have a proven track record, they will likely know what they are doing and be able to create those generous returns. However, if this is the entrepreneurs first time around it’s best to see post-revenue. Post-revenue is important to judge if the market believes in their product as much as they do.