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Market size and growth
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Problem and solution
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Team and traction
4
Competition and differentiation
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Business model and unit economics
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Vision and exit strategy
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Here’s what else to consider
As a venture capitalist, you have to evaluate hundreds of potential investments every year. How do you decide which ones are worth your time and money? How do you avoid missing out on the next big thing or wasting resources on a flop? Here are some key factors to consider when assessing an investment opportunity.
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- Tarek Kettaneh Retired Senior Lecturer at American U of Beirut and Owner,, former director of MBA program
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- Sagar Singh Setia Founder @ Marquee Finance by Sagar LLC | Financial Newsletter, Global Macroeconomic Analysis | Investor
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1 Market size and growth
The first thing you want to know is how big and how fast is the market that the startup is targeting. Is it a niche or a mass market? Is it growing or shrinking? Is it saturated or underserved? You want to invest in startups that have a large and expanding addressable market, meaning the number of customers who can and will buy their product or service. This gives them more room to scale and generate revenue.
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- Tarek Kettaneh Retired Senior Lecturer at American U of Beirut and Owner,, former director of MBA program
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USE the P.O.C.D. acronym:P: Do you believe the founders have the requisite background in the industry they want to compete in?O; Is this product / service AN ORDER of magnitude better than what exists on the market? How big is your addressable market, and can you reach it economically? What is your estimated monthly 'Burn Rate' before you break even and how long to you need to get there?C: Are the legal framework and the digital infrastructure supportive of your venture?D: Assuming all your estimates pan out, how much money do you want to raise and what percentage of ownership are you willing to relinquish for that? On the basis of your answer, does my risk /reward profile look attractive?
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- Karthik Prabhakar Managing Partner @ PeerCapital | Venture Capital, Portfolio Management, Startups
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Another key criteria to apply: is it an existing market or a new market is getting created. A lot of companies that got funded during 2007 - 2012 in India in the eCommerce space were looking to cater to an emerging market that didn't exist - the online/digital consumer market. A few companies like Flipkart, Myntra, Lenskart ended up catering large, rapidly growing markets whereas there were many companies that focused on other verticals - like devotional needs, sporting needs etc which could not see the light at the end of the tunnel as the market for those verticals were fairly small and still not growing rapidly. Fast forward to 2023, AstroTalk is growing rapidly and catering to a large market which continues to grow bigger.
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1- Market Size: Gauge potential market growth and size.2- Product Viability: Assess solution's uniqueness and scalability.3- Team: Review their expertise, adaptability, and track record.4- Business Model: Examine monetization and profitability paths.5- Competition: Identify market competitors and differentiation.6- Traction: Check for sales, user growth, or customer interest.7- Financials: Analyze projections and unit economics.8- Exit Strategy: Determine ROI via acquisition or IPO prospects.9- Due Diligence: Validate founders' background and claims.
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2 Problem and solution
The next thing you want to know is what problem the startup is solving and how they are solving it. Is it a real and urgent problem that customers face? Is it a pain point or a gain creator? How does the startup's solution differ from existing alternatives? How does it create value for customers and capture value for itself? You want to invest in startups that have a clear and compelling value proposition, meaning the benefits they offer to customers outweigh the costs and risks.
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- Fazlur Shah LinkedIn Top Voice| Growth-Stage Investing | Investment Banking| Fundraising| Startup Advisory| Deal Sourcing| Venture Capital| Private Equity|
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Product/Technology for Solving a Problem: Assess the uniqueness and scalability of the product or technology. Does it offer a competitive advantage?Example 🚗: Tesla's innovative electric vehicle technology attracted venture capital because it disrupted the automotive industry with sustainable transportation solutions. 🔌🚗
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- Cristobal Perdomo Co-Founder and General Partner at Wollef
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Thinking about the problem you are solving is just the start. The most important question is: will people be willing to pay for it, and if so, how much?
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3 Team and traction
The third thing you want to know is who is behind the startup and what have they achieved so far. Who are the founders and what are their backgrounds, skills, and motivations? How well do they work together and with others? How do they handle feedback, challenges, and failures? What are their milestones, metrics, and evidence of product-market fit? You want to invest in startups that have a strong and diverse team, meaning they have the right mix of talent, experience, and passion to execute their vision.
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- Navin Goyal MD Venture Capital With People at the Center: Fueled by Physician Ethics and Clinical Experience, 3x Founder, Learning as a Girl Dad, and an Underdog Mentality.
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The most consistent thing in the entrepreneurial journey may not be the vision, the product, the service, or the target customer… but there is a high chance the founding team will be there through the thick and the thin. Traits to look for:1. Humility- because they will need help, to ask for help, and to surround themselves with complementary skills. 2. Resilience- an expectation to have obstacles and doubt creep in every single day. 3. Self-awareness- understanding they are in the best position today but tomorrow can be a new problem that requires a new perspective. 4. Experience- it helps if they have navigated the rocky entrepreneurial journey before. Remember the people may be our most consistent factor. Good luck out there!
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- Hjalmar Gislason Founder and CEO at GRID
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The earlier stage the company is, the more everything comes down to the team: Does the investor believe that the people across the table are - not only able - but *uniquely suited* to deliver on the presented vision.
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4 Competition and differentiation
The fourth thing you want to know is who are the startup's competitors and how do they stand out from them. Who are the direct and indirect competitors in the market? How do they compare in terms of product, price, quality, and customer satisfaction? How do they market and distribute their offerings? What are their strengths and weaknesses? You want to invest in startups that have a competitive advantage, meaning they have a unique and defensible edge over their rivals.
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If you look at Netflix's success, its foundation is on competitive analysis and building sustainable competitive advantage.Netflix distinguished itself from Blockbuster with a subscription and no-late-fees model. When it shifted to streaming, it further set itself apart with original content and a smart recommendation system, securing a unique and defensible competitive edge.In addition,✔️ Intellectual Property: Patents can act as barriers to competition.✔️ Customer Loyalty: Long-term relationships can fend off competitors.✔️ Economies of Scale: Large startups can undercut smaller rivals on cost.✔️ Brand Recognition: A well-known brand has a competitive edge.✔️ Supply Chain: Efficiency or ethical sourcing can be differentiators.
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- Anurag Kapoor
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Competition is not always negative. Competition may also be looked as a validation, a benchmark, something to learn from, and something that keeps the team way from the feeling of complacence. Constructive competition is extremely important for any venture to keep innovating and evolving.
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🧠 One of the main mindset changes is to learn to read the competitive advantage from what the customer really needs and values (which is not necessarily what they claim to need), and to avoid comparing ourselves to competitors and their functionalities. 👉 As they say, this is about the customer and its needs, not about you and your products.
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5 Business model and unit economics
The fifth thing you want to know is how the startup makes money and how profitable it is. What are the startup's revenue streams and cost structures? How do they price their product or service? How do they acquire, retain, and monetize customers? What are their key performance indicators and unit economics? You want to invest in startups that have a viable and scalable business model, meaning they can generate more revenue than expenses and grow without compromising quality or efficiency.
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- Sagar Singh Setia Founder @ Marquee Finance by Sagar LLC | Financial Newsletter, Global Macroeconomic Analysis | Investor
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I think with the startup space being highly competitive, customer retention is the key. If a startup needs to burn money extensively to retain a customer (also known as Customer Retention Cost: CRC); then long term viability and profitability will be in question for the startup. Another key challenge that startups need to mitigate is generating incremental revenue from the same customer without spending more. In other words, once you have retained the customer; the startup must be able to increase the revenue per customer without incurring significant costs and churn.
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- Fazlur Shah LinkedIn Top Voice| Growth-Stage Investing | Investment Banking| Fundraising| Startup Advisory| Deal Sourcing| Venture Capital| Private Equity|
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Business Model: 💰Understand the monetization strategy and sustainability of the business model.Example 🎮: Supercell's mobile game model, including in-app purchases, led to venture capital investments due to its profitable and sustainable approach. 📱💎Traction and Growth 📈: Look for evidence of user adoption, revenue growth, and customer feedback.Example 📦: Shopify gained venture capital support as it became a leading e-commerce platform, enabling businesses to thrive online. 🛒💼
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- Patrick McMillan Consulting CFO - Amplēo | QofE (Quality of Earnings) Guy | Transaction Advisory Services | Financial Due Diligence (FDD)
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When assessing an investment opportunity, understanding the profitability and cash flow (including unit economics) are very high on the list of importance. Of the many ways to do this, financial due diligence (FDD) is one of the best ways. You can do this via a Quality of Earnings (QofE), which will report on the specifics of the financials. A QofE will include validating the supporting documents of the financials, looking at concentrations (customers, vendors, products, etc.), and speaking to the actual quality of the reported earnings and how well they represent the true economics of the company. This report helps you to determine how viable and scalable the company is, and therefore assess if it's an opportunity to pursue.
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6 Vision and exit strategy
The sixth thing you want to know is what the startup's long-term goals and plans are. What is the startup's vision and mission? How do they align with your own values and interests? How do they measure their impact and success? What are their growth opportunities and risks? How do they plan to exit the market or achieve liquidity? You want to invest in startups that have a clear and realistic vision and exit strategy, meaning they have a roadmap for creating and capturing value and a way to reward their investors.
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- Daniele Viappiani Venture Capital Investor @ GC1 Ventures | Former Civil Servant
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This is where it all comes together. Ultimately a venture investor needs to think about what their return will look like (often expressed as a cash-on-cash multiple). Current growth, unit economics, Market size, Go-to-Market Strategy, and the big vision, all will feed into an assessment of what the return might be in an optimistic and a pessimistic scenario.
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One of the key considerations seasoned investors have upfront when looking at an investment opportunity is to understand potential exit strategies. So, as a startup founder, be prepared to articulate your ideas about your exit strategies for investors, using hard data and examples from other similar deals. Don't simply state that you will IPO it, and investors will become a billionaires. The percentage of startups that reach the IPO phase is actually very low.
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7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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🚀 It is key to understand that there is no one-size-fits-all advice, and that there are many nuances to be taken into account. But as a general rule, what holds the most weight when analyzing a company depends on where the company is at the moment:- Seed: Team > Traction > Market- Series A: Market > Traction > Team- Growth: Traction > Market > Team
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Let’s also bear in mind that this topic is more nuanced, and approach (and criteria for evaluation) should be tailored to maturity of a startup, as a minimum.Focus of attention, importance/weight of individual factors, relevance and even availability of certain data points… it all depends. Hence, pre-seed will be considerably different from seed, or a growth startup. Not even mentioning specifics of evaluation of a late stage startup. For example, at seed, oftentimes, there is simply no reliable financial data or history to look at, the team still figures out its product-market fit, experiments with what works in terms of go-to-market etc.
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