Comprehensive due diligence is a must for investors who are considering an investment in a startup. Depending on the investment vehicle, the age and stage of the startup, you will want to spend more time evaluating some areas over others. Here 5 general criteria to consider:
Before you open your checkbook, assess the revenue, business development deals, channel partnerships, and user volume and growth. Like most investors, you want a piece of a startup that’s happening and that can produce evidence they are going somewhere.
Look at the management team. What are the collective qualifications, backgrounds? How about the talent level? Is it sheer genius? Do you see a mix of entrepreneurs on the team who’ve had previous success, who boast industry, operational and technical expertise, along with financial prowess? Do they get along and like each other?
Skin in the Game
How vested is the management team in their business? Have they invested any of their own capital into the business? What do they lose if the business fails? Will there be sufficient incentives for them to continue working in the business past the tough times? Investors will want to see a dedicated management team that has a vested interest and commitment in the business so that they will do anything they can to ensure the success of the business.
It’s not just prior success that is a predictor of the future success, but it sure helps. Taking a look at the track record – of the enterprise and of the team – can tell you a lot. Take a look at their network as well: a strong, large network will tell you a lot about the past experience others have had with this team and/or entity. A large network is not built through generating repeatedly bad experiences or unrealized expectations.
Investors are treasure-hunters at heart. Even though the investment game is far from sure-win, taking a look at the factors that will influence your treasure, or return, is obvious requirement. What’s the expected return? What’s the percentage of equity you expect in exchange for your investment? How much money has the founder or leadership team already injected themselves? What is the growth trajectory? And of course be ready for a good negotiating session. As an investor you are more likely to want a bigger equity slice than your startup is willing to part with.
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