One of the things that I have been pondering lately is how I can evaluate startups and startup ideas more systemically. There is good reason for this; I am looking for my next venture. And as I was contemplating how to go about this a thought popped into my head. Evaluate them in the same manner that investors do. Which took me back to a lesson I learned from Merrick Furst, the founder of FlashPoint.
Merrick taught an undergrad entrepreneurship class at Georgia Tech. I sat through some of them. During one Merrick explained a venture risk framework that most investors used even though they generally don't talk about it. The framework included management risk, market risk, product risk, and funding risk.
From an early stage investors perspective all startup milestones should be focused on reducing management, market, technology, and funding risk. And if you are going to be investing the most precious commodity in the world, your time, it is not a bad lens for an entrepreneur to use as well.
Looking at startups and startup ideas through this lens leads to a host of questions to ask to evaluate the risk inherent in the opportunity. You need to get to a point where you can decide if the idea is something that could become a real company. Below are some of the questions to ask.
- Is there extreme need/pain being felt by an individual or group?
- Do they have money to spend?
- Are there enough people feeling the pain, or put another way is the market intuitively large enough to create a meaningful company?
- Is there any potential potential impact of government action?
- Is management team passionate about the market?
- Can a team of A players be attracted to the startup (many of which are asking the same type of questions listed here)?
- Doe the team have experience in the space with deep domain knowledge.
- Does the team have the ability to leverage personal networks to build the business.
- Does the team have strong past professional relationships built on mutual respect and trust.
- Does the team have shared values and work ethic.
- Can a product be created to address the market need with the team that can be assembled?
- Can a compelling step function improvement unique selling proposition be created?
- How can long-term sustainable differentiation be created?
- Is the business model capital efficient?
- Can it get to revenue within one year and a repeatable sales process within two years.
- Can the team fund it to cash flow positive or further investment?
You also need to ask yourself if the startup is one where you can have an impact. You have to look at it through the lens of your own personal experience and the value you can bring. For example when I personally evaluate startups or startup concepts I look for a business to business SaaS or SaaS like Internet company with a consumer element where sales and marketing are key drivers to business success. I know I can have a significant impact on these type of businesses.
Your lens is likely to be much different. Know what it is and focus on it.
Look at startup concepts and startups through the lens of investors and your personal experience. If you do you are more likely to find a winner.