5 Criteria for Investors to Consider When Evaluating a Startup

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:

Traction

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.

Team

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.

Track Record

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.

Treasure

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.

Are you an accredited investor in need of verification? VerifyInvestor.com is a reliable and confidential provider of investor verification services.

Updated 10/12/2022

Performing due diligence before any investment is always prudent. Additionally taking the required steps to make sure an issuer is doing all they can to protect you and have your best interests can also improve your chances of choosing the right fund. Avoiding scams is also one of the most important steps when venturing out into new markets. Scammers have only increased in volume since the pandemic sent investment processes only, much of what used to be done in person. Stay clear of these common pandemic-related investment scams by following our previous guide here. There are also many Initial Exchange Offering scams to be aware of and avoid as well.

Conclusion

There are of course great opportunities for portfolio diversification, especially in private markets. Regulation D, Rule 506(c), expands the ability to raise capital as well as seek capital. Although “reasonable steps” must be taken to prove accredited investor status to either sell or buy this category of investments. As a third-party vendor, VerifyInvestor.com can take care of this process for both accredited investors and fundraisers.