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.
Traction
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.
