Investing in startups is a risky venture, especially in early-stage startups where the product is still untested, and the revenue is still a myth. But if you find one which has the potential to generate returns, then it could be an opportunity worth pursuing.
But, how do you figure out whether a startup has the potential to give you a 10x return on the investment or not?
While there is no set formula to ascertain the guaranteed success of startup investment, there are certain traits in a startup that gives away a positive growth trajectory.
After interviewing 100 seasoned angel investors, we have drawn the process of how to make smart angel investment in a startup -
Investing in startups comes with the risk that can only be neutralized if you have a good vetting process in place. Here are a few things you should keep in mind while evaluating an early-stage startup -
The first thing an investor looks at, irrespective of the revolutionary idea, is whether the startup idea is feasible and viable? How does it aim to disrupt the market? Every seasoned investor has an investment thesis critical to their investment strategy, and much relevance is implied to a ‘startup idea’ in every investor’s investment thesis.
It incorporates a combination of the following elements –
While evaluating the startup, knowing people who have experience working in the same niche is an added bonus for many investors. They want to ensure that the team responsible for managing and running the startup is competent and has skin in the game.
Before investing, it is essential to understand the market size for the solution a startup is providing. If the market is small and the cost of the solution is high, then the possibility of scaling in the future minimizes the startup's success.
Therefore, it becomes ever so important to identify the market size and how well it stacks up in the market or against its rivals.
Is the product ready? If yes, does the product witness any traction? How well does it fare against its possible competition?
Most angel investors look for startups that have demonstrated marketable products or services. If it doesn’t, knowing the market size and the possibilities of serving the larger audience with affordable solutions makes it enticing.
How a startup intends to acquire customers and generate revenue? This can be answered by looking at the startup's pitch deck that contains the channels a startup will be employing (Go-to-market strategy) to sell off the services. The pitch deck will also include the prices of the service and the margin per sale against the expenditure.
Based on it, you can evaluate whether the startup has a sound business model to generate revenue.
Scalability is one of the most critical aspects of evaluating a new startup. Of course, the word itself has different meanings depending on the context, but it is generally used to describe how well a startup can grow in the startup ecosystem.
How a startup intends to grow the user base from 100 to 10000?
There are several ways to evaluate a business's potential for success in terms of scalability. Valuing the most scalable businesses in terms of their market capitalization and revenue growth is one way to measure how well they will do in their endeavor to grow.
Long before evaluating the startups, you need to identify and scout the startups.
Once you’ve found a startup that fits well within your investment thesis, it is time to invest in the startups.
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