If you love it, buy it. But still check it, before you buy it!’
Start-ups “the new age turbine” have been evolving at a speed faster than expected. The biggest accelerators for these start-ups are the commandos in these spectra the “Angel Investors”. These days, angel investment is being looked at as a profession considering the high rewards associated with it, despite the high risks. Well, it’s not the space, if you are looking for your retirement stash.
So, while learning the art of angel investment every day, I thought what a better topic could be than to write about sharing 5 check-the-box points I look at, before investing in a start-up.
Check 1: Commander and his troops
This one carries almost 70% weightage in my decision to invest or not to invest in a start-up. Investing in an early age start-up is different than investing in any other start-up or company. It is preferred to avoid investing in a start-up with a single founder. Having more than 1 founder gets not only varied experience & expertise on the table but also a balance and stability from risk attached with dependence on a single founder.
It’s imperative to gauge the founders’ skin in the game. Founders having more than one business interests tend to defocus. Always prefer start up where it’s the only venture of the founders and they are fully invested mentally and physically in taking the start-up to success. I believe that smart Founders can convert and flourish even an average business idea into a successful business venture. But the reverse of it can never be vouched for!
“Great ideas are weightless without unblemished execution and committed support.” As an angel investor, I resist investing in a start-up which does not have a strong team and doesn’t even intend to hire one, with all key functions being driven by founders only.
At last, it’s an X-factor which connects a founder and an investor, making investor believe in the story narrated. It’s an investment in the people driving the vision and not the company. It is important to know the founder and the strong team backing the vision & passion of the founder.
Check 2: Size of The Pie
With recent drastic shift to economy of apps, it is very important that product or service caters to a larger market. Large market doesn’t mean present market, but a futuristic addressable market. Whether a product or service is for everybody? Is it product or service which is good to have or must have one? An industry thrives because of its customer. Invest in a product creating a revolution.
Based on my experiences, product or services that intend to disrupt traditional way an industry works, shows immense potential. I favour start-ups which have put forth and started executing steps to achieve their marketing strategy rather than just laying out a marketing strategy plan.
It doesn’t matter how brilliant the product is, unless there is market large enough to embrace it.
Check 3: Revenue Riddles
It is crucial to look at a company’s monetization strategy ,to find if it has a clear path at times of storm. Its revenue model has to be strong enough to sustain in tough times. I examine how gross & net margins are sketching on the board.
It may incur loss in the short run to penetrate the market, but whether it has potential profitability of the business in a steady state environment. Also, pivotal to know the point of time, when start-up plans to achieve break-even in business, whether it has sufficient capital to meet the cash requirements of business to achieve its desired growth.
Needless to say, first gain is what really matters!
Check 4: Proposition and Opposition
Another aspect that stands important, is the area of operation of a start-up. Whether it has tides of competition from other players? Or is it the only player for its operation? It is one of the key decisive factors before making an investment.
If competition is a shark, it can acquire the start-up like a small fish rather than twinning their work. It’s beneficial to investigate and validate the appetite in the market.
I’d rather invest in a start-up that has the ability to demonstrate the engagement of their product and useful reviews than the ones still sitting in labs experimenting.
It is also important to verify the math; start-ups would tell you about the valuation of company. Whether it can be justified or they are just empty wishes?
Check 5: KYV (Know Your Vendor)
Present customer base and the potential one being targeted is something which is essential while deciding on investing. It’s equally important to be aware of vendors associated with the start-up. Think of any marketplace without proper supply-base – Be in Cab Aggregation, E-Commerce or Foodtech. It helps to gauge diligent supply in future, basis changing market conditions.
Though these might not be thumb rules for investing, they definitely give a piece of perspective of the grass on the other side of the fence. Having said that, these are the mantras I believe in. But one catchword, ‘INSTINCT’ goes much beyond all this and it is something that cannot be taught, but simply trusted.
[This article is authored by Mitesh Shah – Co Founder – IPV]