A Checklist For Evaluating Early-stage Startups
How do you spot the tell-tale signs in a startup that give away a positive growth trajectory?
Here's a summarized checklist to help you evaluate startups and a small test at the end to help you test your newfound cheatcode :).
How to pick and choose...
Investing in startups comes with the risk that can only be neutralized if you have a good vetting process in place. Here are a few things you should keep in mind while evaluating an early-stage startup -
1. Evaluate Startup Idea
The first thing an investor must look at, irrespective of the revolutionary idea, is whether the startup idea is feasible and viable? How does it aim to disrupt the market? Every seasoned investor has an investment thesis critical to their investment strategy, and much relevance is implied to a ‘startup idea’ in every investor’s investment thesis.
It incorporates a combination of the following elements –
- Type of company (e.g., B2B, B2C)
- Target market/industry
- Stage of the company (e.g., idea, seed, growth, etc.)
- Company location
- Founder demographics
2. Ascertain Credibility Of The Team
While evaluating the startup, knowing people who have experience working in the same niche is an added bonus for many investors. You want to ensure that the team responsible for managing and running the startup is competent and has skin in the game.
This is where you try to get a measure of the Founder-Market Fit.
3. Identify Market Size
- How big is the market for the product?
- Does it solve a significant problem?
- Will customers pay for the solution?
Before investing, it is essential to understand the market size for the solution a startup is providing. If the market is small and the cost of the solution is high, then the possibility of scaling in the future minimizes the startup's success.
Therefore, it becomes ever so important to identify the market size and how well it stacks up in the market or against its rivals.
4. Minimum Viable Product Ready - Traction
Is the product ready? If yes, does the product witness any traction? How well does it fare against its possible competition?
Most angel investors look for startups that have demonstrated marketable products or services. If it doesn’t, knowing the market size and the possibilities of serving the larger audience with affordable solutions make it enticing.
5. Scope Of Revenue
How a startup intends to acquire customers and generate revenue? This can be answered by looking at the startup's pitch deck that contains the channels a startup will be employing (Go-to-market strategy) to sell off the services. The pitch deck will also include the prices of the service and the margin per sale against the expenditure.
Based on it, you can evaluate whether the startup has a sound business model to generate revenue.
6. Future Roadmap (Scalability)
Scalability is one of the most critical aspects of evaluating a new startup. Of course, the word itself has different meanings depending on the context, but it is generally used to describe how well a startup can grow in the startup ecosystem.
How a startup intends to grow the user base from 100 to 10000?
There are several ways to evaluate a business's potential for success in terms of scalability. Valuing the most scalable businesses in terms of their market capitalization and revenue growth is one way to measure how well they will do in their endeavour to grow.
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Remember, assessing a fledgling venture requires the finesse of a sommelier savoring the finest vintage. It's not just about checking boxes; it's about understanding the delicate dance between potential and peril. With each item ticked off, you'll unravel the startup's enigmatic veil, revealing its true colors. 1stCheque is happy to be a part of this journey with you.