Investing in a startup can be a challenging decision, especially when you have a lot of choices! After interacting with thousands of startups, I discovered a few unique traits that all the successful ones possess. Want to know the secret? Read more!
Key Points
- 38% of startups fail because they run out of capital.
- Investors spend on average just three minutes and 44 seconds looking at pitch decks.
- Only .05% of startups get VC funding.
The Dilemma Of Choosing The Right Startup
Welcome to the world of startups where innovative ideas and ambitious founders welcome you. The search for promising startups to invest in is not unlike a treasure hunt, where you sift through a vast sea of possibilities, each presenting its own unique set of challenges. These challenges range from assessing an idea’s viability and the founding team’s competence to gauging market demand and competition.
For investors like myself, the responsibility lies in nurturing these fledgling ventures, guiding them through their teething phase, and helping them achieve their full potential. The stakes couldn’t be higher. The decision to allocate financial resources to a startup demands meticulous due diligence, as one wrong move can lead to substantial financial loss. It’s a risky yet potentially rewarding path that requires a keen eye for opportunities.
Identifying and investing in startups is a formidable task, laden with uncertainties and complexities. This blog is for you if you are confused about where to invest. Here, I will share my experience after combing through thousands of startups and funding hundreds over many years, many that have become unicorns. I will share my strategies in finding the needle in the haystack!
My Journey: Finding The Right Startups
Over the years, I’ve had the privilege of not only investing but also assisting startups in raising millions of dollars. Every year, my team and I at Exitfund receive more than 2,500 applications requesting investment and fundraising support. Each application consists of information on the founder and company through their presentation deck. We carefully sift through this extensive pool to uncover the gems that hold the potential for significant growth and success.
Although at the time being we can only select around 100 startups out of the pool, over time, we want to elevate this number to over 1,000 startups annually, and have applicants in the 10,000s. It might seem like an ambitious target, but given our experience, network, and unwavering commitment to nurturing the entrepreneurial spirit, we want to help as many strong startups excel.
Why do only around 1% of startups successfully make it through our rigorous selection process?
Our diligence process has two stages. First we review the application and then if that goes well, we do a few pitch meetings with the startup to see if it’s a good fit.
The entire process is a month-long journey filled with intense scrutiny and continuous evaluation. It’s not a process to be rushed or taken lightly. Every decision we make profoundly impacts the startups, our portfolio, and our reputation. This month-long process allows us to conduct in-depth due diligence, assess risks, and ensure we make sound investments.
The First Step: One Presentation Says A Lot
It might take a month to determine whether to invest. However, it takes just one glimpse of their startup deck to realize whether they have potential or not. The power of a presentation cannot be overstated when making investment decisions in the world of startups. It serves as the very first impression that founders make on potential investors, and within a matter of minutes, it can either pique our interest or leave us unimpressed. This initial interaction is critical as it often determines whether we’ll delve deeper into evaluating the startup’s potential or move on to the following proposal. In essence, a presentation is like a window into the startup, offering us a glimpse of what they have to offer and their vision.
Here 90% of startups will fail to move to the next step. This presentation is more than just a collection of slides; it’s a narrative that should capture the essence of their business, vision, and potential and the investor’s interest. And that is not an easy task.
The Second Step: Meetings To Close The Deal
If the startup was able to pass this initial step, then next we arrange a few meetings we are diving deeper into a few things:
- The team behind the startup: The team is the driving force behind success, so we focus on who they are, why they are involved in this venture, and why we should believe they are the right team for this. The team must be excellent, and we seek out individuals with a strong track record and the capacity to execute their vision.
- The problem: While a great idea is essential, it’s equally crucial that the startup addresses a problem that customers need solved. It’s not about the specific solution they propose, as this will keep iterating, but rather, it is this something customers want. The market timing, level of innovation, and number of competitors are critical factors in our evaluation.
- The alignment: Is there a “founder-market fit”? The founders should have a deep understanding of the market they are in and the problem they are trying to solve. This alignment increases the chances of success, demonstrating that the founders have an innate connection with their venture and know what the market wants.
Throughout this process, we are carefully reviewing all information like the business plan, financial projections, and market research. We look for concrete evidence of feasibility and potential for growth. This stringent evaluation process ensures that we invest in startups with a solid foundation and a realistic path to success.
Secondly, while data is essential, intuition plays a significant role in decision-making. From the meetings, we consider the founders’ passion, dedication, and vision. A great startup is not just about numbers; it’s also about the people behind it. We place a premium on founders who exhibit a deep ability to adapt to changing circumstances and the determination to overcome the inevitable storms of entrepreneurship.
The Red Flags
Although there are a few things we’d like to see, even more importantly, there are certain things we cannot invest in.
The ability to identify red flags is critical when evaluating startups, as these indicators play a crucial role in shaping the impression we form during our analysis. Here are three key areas that I found after interacting with hundreds of startups you should be aware of:
- Strategy: One of the most common red flags we encounter is that a startup’s strategy doesn’t make sense. For instance, when the initial target customer isn’t clear and maps out a large population, then the go-to-market also doesn’t have focus. It tells us that they’re throwing darts and hoping one lands.
- Core People: The people involved in a startup, particularly the founders and the core team, are central to our evaluation. Red flags in this category can range from issues with the founders’ track records to issues with honesty. Red flags in this area are a guarantee that we will not invest.
- Company Culture: While many investors may overlook this aspect, we prioritize evaluating a startup’s company culture. Toxic work environments can have long-term detrimental effects, affecting employee morale, productivity, and, ultimately, the startup’s success. We seek to avoid investing in companies with a culture that hinders the well-being of their workforce. A startup with a healthy, inclusive, and motivating culture will likely thrive in the long run, making it a more attractive investment prospect.
What Do I Look At In The Startups?
On the flip side, I also actively look for green flags – positive signs that indicate a startup’s potential for success. Here are some of the critical green flags that make a startup stand out as an ideal investment opportunity:
- Trust & Integrity: One of the most critical green flags is the presence of trust and integrity within the startup’s leadership and team. When they are honest and transparent, it sets a positive tone for the entire relationship. Rather than trying to impress, they express who they are and what their startup represents. This sincerity builds trust and aligns with our core values, making the startup more appealing for investment.
- Grit: Resilience and determination, often called grit, are solid green flags. Startups that exhibit unwavering commitment, the ability to overcome setbacks, and a relentless pursuit of their vision are more likely to overcome the challenges of entrepreneurship. Grit is often a significant predictor of long-term success.
- Real Numbers: A startup that provides concrete, data-driven evidence of its progress is highly appealing. Metrics or KPIs that are key to the startup such as user engagement, growth rates, or other vital statistics which indicate how well the startup resonates with its target audience show us that the team knows what matters and are focusing on it.
- Market Research: Comprehensive and well-informed market research is another positive sign. A startup conducting a thorough analysis of the market size, competition, and demand for their solution is better equipped to succeed. Green flags in this category indicate that the startup clearly understands its market and the potential for its idea to make a significant impact. A lack of direct competition at the startup level, combined with innovative thinking, is a solid green flag that suggests unique value and untapped market potential.
Build A Long-Term Relationship
- The best startups stay connected and foster relationships.
Investing in startups is a dynamic and ever-evolving process. Not all promising startups align perfectly with our investment criteria right from the start. Sometimes, we might have reservations or overlook a startup’s potential, but that doesn’t mean we completely disengage from them.
Maintaining a connection and building a rapport with these startups can be immensely valuable. We can witness their growth and development over time by staying in the loop and continuing to engage with the founders. This can provide valuable insights and perspectives that may lead us to reevaluate our initial decisions and potentially invest in them later.
Conclusion
This blog should serve as a valuable resource for budding and seasoned investors navigating the intricate world of startup investment. Drawing from my own experiences of engaging with numerous startups, I’ve aimed to provide a comprehensive guide to help you discern which startups are worth your investment.
Yet, going through all of these elements is easier said than done, and may feel complicated as a beginner investor. If you want to take the easier route and consider the startups we are investing in, along with our thorough due diligence, join us at Exitfund.
Through our due diligence, learn to recognize the red flags, identify the green flags, and appreciate the significance of building lasting relationships. Make investment decisions that align with your vision for high returns through innovation and growth.
Have you started your investing journey? Share your experiences in the comment section!
