In the age of we-only-read-short-posts and we-don’t-have-time-to-deepen, it became very fashionable to make shortlists and rankings of intricate topics explained. It became so fashionable that now it is almost over. So, let me revamp it with a controversial post, as many expert investors may argue it. But, believe me on one thing: in the end, investing in a startup it all goes down to the coming 3 aspects:
- The market. Is there a market for the product/service proposed? Is it solving a real problem, filling a gap in the market, or even creating a new market based on new trends? Studying the market implies also understanding the timing. So many doomed-to-fail startups were ahead of their time, like Webvan (home delivery grocery that declared bankruptcy in 2001, before being absorbed by Amazon) and others collected in this article.
- The team. Do I seriously need to stress that? You can be successful on a mediocre idea, when you have the right team in place, but you can’t succeed even with the best idea, with the wrong team. On top of obvious skills and expertise you need to look at, which are often project-specific, you also need to understand very personal features, such as attitude, purpose and dynamics among the team members. You want to know more about statistics of successful teams? Have a look to this 10-years research.
- The deal. As simple as that: is it worth investing? Regardless its business, its team, its value proposition, is it a good deal? Alright, what makes it a good deal? As per most of transactions it depends on price, terms and conditions. Price is given by the valuation. I’ve seen so many startups with inflated valuation and I can tell you they are not good deals! Terms are basically listed in the shareholders agreement (or term sheet indeed). Is it fair? Are the new shareholders protected enough for the risk they are running? Conditions need to be understood in detail: I mostly refer to exit strategy.
As you might have noticed, I didn’t mention anything about the idea and/or the product itself. They are not irrelevant, but, again, in the end, it all translates into above listed items. While one aspect is not enough to overrule the other two, it is perfectly fine when one just prevails and becomes the very reason of your investment, given that the rest is considered acceptable.
A more recent example of combined bad-market and bad-team is given by Skully Technologies, developing highly digital helmets with embedded AR display. After raising $2.4m on a crowdfunding platform, they failed to deliver the products. Big personal pain, as I loved that project, but fortunately didn’t invested in it.
Have a look to my invested portfolio instead: if you are curious, you can ask me what of the above criteria apply to each.