It is no surprise that in the current business climate of low or even sub-zero interest rates and arguably overpriced equity markets, investors are on the hunt for alternative avenues of investment. Injecting seed funding into promising young startups is one such investment that has recently grown to be very popular. This form of investment is extremely rewarding but naturally, comes with significant risks.
With that in mind, it is necessary to analyze startups when considering whether or not to invest. The importance of standard analysis using financial ratios and metrics (which are reviewed here and here) is widely acknowledged. However, since these businesses are either unlikely to have much historical financial data available or might possess highly skewed financials (due to them still being in the early stage), this article will instead explore five essential non-financial aspects of a young startup that are equally as, if not more, important to your investment decision.
If you are a potential angel investor, there are many opportunities worth exploring in order to fulfill some of this capital demand, as long as you take some considerations and precautions before embarking on your journey. Before you invest in a startup, make sure you prepare to cope with these perks – and quirks of an entrepreneurial ecosystem:
It seems obvious, but founders come to me with ideas that seem so farfetched it’s hard to believe that they thought the product or service would work in the first place. You must know the issues, the problems being addressed, the players and the customer base. Going into a sector and niche that is oversaturated just makes it harder for your company to stand out. Finding a niche that no one cares about is equally fraught with an uncertainty of success.
If your business doesn’t change the way people do things or see the world, you are not going to make waves and get noticed by customers or the media. You want media attention! Sure, you can make widgets until the cows come home, but having a real impact on the world is what dreams are made of.
If you think running a startup with you, a co-founder and a couple of staff is easy, see what happens after your first seed round. If you are not comfortable managing the business, things will begin to fall apart. It won’t hurt to take on a couple of online courses to tune-up your general management skills. As you get more capital, consider replacing parts of your jack-of-all-trades CEO role with professionals. Investors want to know you can take care of their investment and have general business skills.
In some respects, this should be the first consideration when we are looking to invest in a company - the quality of the person behind the company. Reputations are built on trust and easily taken away. Investors want to know that as the company grows the sincerity, common sense, trustfulness of the founder will come across to both future investors and customers. I worked with a company whose founder had a bit of a ‘shady’ past. There is nothing serious, but enough to have people whisper at investor events. Needless to say, his company didn’t remain a client for long.
If you haven’t figured it out yet, the product is just a piece of the puzzle, Of course, it has to be great, but the three most important reasons to invest in your startup and not the other guy is the differentiation of your business through the quality of its people, the global market reach or distribution you can attain and the product. Without all three, finding investment is difficult.
I’ve been in presentations where the founder was so sincere and passionate that she came across like Mother Teresa. The reverse, of course, has been true as well. Investors want to know you have some special skill that they can be reassured that your startup can make it past the first year.
Seems like an easy request, but when you’re trying to do press releases, managing programmers and finding capital, it’s not that easy to focus on building a company. How you deal with the distractions and keep yourself focused on getting to the top will be a clear message to any investor. This also goes back to management. If you are working above your skill grade, find someone to help, be it a new employee or a mentor. I ‘shadowed’ a CEO for months because he constantly lost his focus and needed not to show it in front of his co-founders and investors. To keep him on track, two heads were a lot better than one, and he managed to get to the liquidity event successfully.
Investors love to see founders pull resources out of thin air and manage what they have with lean determination. This puts the control of the company firmly in the hands of the founder. Having all the control and running the company smoothly as well as lean shows the investor you have sound judgment and worthy of investment.
There’s nothing worse to have two behind the scene nerds try to convince an investor to put money into your venture. You can’t afford to have poor communication cause a stumble on the story to an investor.
