Suddenly it’s all the rage for accredited investors to make lots of tiny bets instead of one or two big ones. And it’s platforms that let people make these very early investments in startups, such as SeedInvest that are powering this new trend.
But are these good bets? Or would you be just as wise to take your cash and put it on “red” at a casino? No doubt, startup investing is risky and the success to failure ratio of brand new companies still predicts failure all too often. That said, there are certain things savvy investors know to look at that can help improve these odds. Here we’ll have a look at five of the most important.
It is true that many startups take a while to get to a marketable product particularly if they are going after a problem that needs some hard technology solutions. When looking at investing however nothing beats solid revenues. You can make some amazing technology that no one really wants or where there is no business case. Google glasses looked amazing, broke news around the world but for a wide array of reasons, the product did not sell.
Story revenues from a number of customers show some elements of product fit and repeatability of the sales process. People want the product and are willing to pay for it. You should look for signs within that such as are those customers increasing their purchase dollar sums, are they consistent.
Are those revenues growing at a pace that you would expect for a company at that stage in the corporate lifecycle? You would expect revenues to be going up and to the right. If they are not, unless you fully understand why and can justify the reason, you should reconsider placing a bet.
Founder track record
Does the founder have a strong track record? One big factor is had the founder had a successful exit before. Running a business is hard and seeing it through to a successful conclusion is even harder.
Even if you do not see this as a factor for success many traditional VCs do. If the startup you are investing in is going to look for investment from traditional investors then they will look for this, not having this checkbox should be something you think about when making that investment decision.
No one wants to be a sheep but there is wisdom in the crowd, especially if those other investors are professional investors. Look to invest in startups where other professional investors have already made an investment even if it is a small one. It is hard to decide which investment to take a position in. If you are lucky enough to have the opportunity to invest in a startup that has already received money from a professional investor then that is something you should think about. Had someone already done the due diligence, vetted thought the technology and the customer contracts, and made sure that the entrepreneur’s story really ads up?
Is there defensible intellectual property underlying your chosen startup. It is always an advantage if there is a great technology team behind a new company. The ability to work to create patentable technology is something you should look for. If they are successful they will have competitors and how will they keep their advantage.
Valuable Customers / Users
Beyond revenue who the customers are counts. Unless you are planning to be Facebook with billions of users, it is hard to make money with users with limited resources. Ten paying fortune 500 customers is better than one hundred thousand kids in emerging countries using an app for free.
I spoke to Commerce.AI CEO Andy Pandharikar has successfully raised one round on Seedinvest which was 700% oversubscribed and is currently raising a second round that is now likewise over oversubscribed to ask what key signals he felt investors were looking for.
Andy said, “Commerce.AI is building a billion-dollar company. Part of our mission is to democratize artificial intelligence. We originally planned to raise an initial $100,000 on the platform a year ago. The opportunity was 700 percent oversubscribed. We literally had to turn down investors. This funding helped us grow our company while progressing our mission.”
The feedback we are getting from investors in our current round is that the success in growth from this round to the last is driving their interest in investing. Since the last round, we have had 890 percent growth in revenue and achieved great customer success. We have signed paid deals with large enterprise brands such as Cisco, Chanel, Netgear, Coca Cola, Midea, USPS, and SC Johnson.”
While not every company is going to take off as Commerce.AI has, there are lots of opportunities to find winners. The key to taking nice winnings off the table is to be shrewd, cautious, and do your homework. By digging into the five major signals above, and making sure you’re seeing green lights all the way down, you’ll be able to reduce risk and increase your chances of your investment producing big winnings.