Friday, May 6, 2016

Startup Investing Guide

Follow the Leader

One of the easiest ways to evaluate a Deal on our platform is to look at the top investors in the round. The investors in the Deal are critical because it creates social proof that the Deal is worth checking out and potentially investing in. Furthermore, this means that the lead investor has performed their due diligence on the Deal and they believed that the team, idea and traction to date equate to a winning recipe.

Following on at the same Deal terms as the lead investor also validates the valuation of the company and the price of the round. Determining the Deal terms can be a long arduous process so it can make investing in startups much simpler to just follow-on at the same terms as the lead investor.

Management Team

We recently did an investor survey and the results showed that over 70% of investors agreed that a strong management is one of the most important points that they consider when deciding to invest.

A company’s management team tells a lot about the future trajectory of the company. Legendary venture capitalist, Paul Graham, wrote an excellent article describing the qualities he looks for in a company’s founders when evaluating a startup. 

The qualities are as follows:
- Determination: Do the founder’s learn from their mistakes? Startups will face hundreds of obstacles, the one’s that deal with each obstacle with strength and determination are often the most successful.
- Flexibility: Do they know how to pivot and accept changes? Often times founders can be extremely stubborn, the ones that are able to make quick changes are the ones to keep an eye out for.
- Imagination: Do the founders think outside of the box? Make sure that you see a unique idea, something that hasn’t been thought of before.
- Naughtiness: Do they follow all the rules? Founder’s who do not follow the status quo of society often find better solutions to problems.
- Friendship: Does the team work well together? Co-founders are like married couples, they need to be compatible and show long term potential.

Something more tangible to look at when evaluating a Deal is the founders past experience. You’ll want to know whether the founders are uniquely qualified to execute on this idea. Another great indicator is if they have a track record for scaling businesses and have shown returns to investors in their previous businesses.


A company’s traction is very important as it gives investors a way to gauge the startup’s growth and execution to date. You’ll always want to see steady and potentially exponential Month-Over-Month growth in their core metrics.

Snapchat is a recent example of a startup with incredible growth metrics. Since launched in 2011, Snapchat has amassed roughly 200 million monthly active users who send 400 million snaps per day. This shows the exponential growth of the company and the numbers would certainly excite any investor.

Here are the main things to look for when evaluating a company’s traction:
- Revenue:  Are they pre revenue? Have the reached cash flow positive? What’s their annual run rate?
- Growth: How many users or customers do they currently have? Are they showing steady MOM growth?
- IP: Does the company have any patents? Have the created something that is not easily replicable?
- Customers/Partners: Do they have any notable customers or partners that use their service?
- Investors/Advisors: Do they have any notable investors or advisors?
- PR: Have they done anything innovative on the PR front to help scale their metrics?
- Influencers: Are there any notable influencers involved with the company to help them expand their reach or help them build a recognizable brand?

Industry Trends

Another thing you will want to analyze when evaluating a startup is the industry that they’re in. You’ll want to know the size of the market and if it is showing growth every year. Only once you have this information, you will be able to determine whether they will be able to grab market share and what owning a percentage of the market would equate to.

One example of an industry that is large and growing significantly every year is Financial Technology. The FinTech industry has now grown to $4.7 Trillion and is showing no signs of slowing down. Also Investments into FinTech startups recently quadrupled, growing from $3 billion in 2013 to over $12 billion in 2014. These are the types of trends to look for when analyzing an industry.

We’ve also found that investors often invest in industries that they know or are passionate about. If you have a deep understanding about an industry, it makes you much more qualified to evaluate the opportunity and if the team is executing at a high level and showing the growth expected in that particular industry.

You will also know the competitive landscape much better if you have experience in that industry. You will instantly be able to match them up against other startups that are in the industry and be able to determine if they are the right team to bet on.

Deal Terms

There’s no proven formula for evaluating Deal terms since pricing a startup is more of an art than a science. A mixture of the company’s traction, industry size, management team and even location in certain instances will determine the company’s valuation.

This is why following the lead investor can make startup investing much more manageable because the lead investor has already set the terms of the Deal allowing you to simply follow-on at the same terms.

If you haven’t already, be sure to self-verify your investor status to get access to trending Deals on Crowdfunder. Once verified, be sure to connect with other investors and entrepreneurs within our network to get notified of all the activity.

via Crowdfunder - 11/30/2015