With the explosion of tech startups in the 90s, investing in them has been a hot topic. From the early optimism leading to the dot-com bubble and then eventually segueing into the market crash in Y2K almost killing the internet startup market, and finally, cautiously the emergence of incubators and large angle investment events that have driven startup growth for the last two decades. This is not surprising at all considering the ROI (return on investment) is only possible if you invest in startups – sometimes, only investing 10K into the right startup might make you 10 to 100 million dollars ten years down the line.
But, although the chances for extreme gains are high, the chances for losses are very high too – almost 50% of businesses fail in the first three years, and the startup you invest in might be one of those businesses. That’s why if you’re thinking about investing in startups, it is extremely important to know how to assess the quality of a startup and the risks associated with it.
This article will help you look at a few factors and indicators that contribute to a successful startup, how to recognize them, and how important they are to your investment strategy.
Who is the Entrepreneur?
The first question you need to answer for yourself is who is the entrepreneur(s) responsible for the startup because they are managing the whole project and the success and rate of return of the project rest squarely on them.
There are some features you need to look for in entrepreneurs that can predict their success:
1. How many entrepreneurs work on the startup?
This being an indicator of the success of the startup might be quite surprising, but study after study confirms it – the best number of entrepreneurs working on a startup is between 2 to 3. Working on a startup is extremely draining, and the average working week is around eighty hours if not more. Half of the people who start a company suffers from anxiety or depression at some point during their journey from rags to riches.
That’s why working alone on a startup is extremely difficult and borderline infeasible – it needs to be a team of two or three to help and encourage each other to work their best on the business. That’s why solo entrepreneurs have the highest failure rates.
The same holds true for a large number of entrepreneurs working on a startup. Due to the difficulty and long hours involved, there is a lot of potential for failure and mistakes. They’ll have difficulty assigning tasks and steering the startup to success, and ultimately, they’ll decide to dissolve. That’s why the chances of failure rise again after three entrepreneurs working on a project.
2. What’re the Credentials of the Entrepreneurs?
Original and cool ideas aren’t a recipe for success, and if you look at the biggest companies today, you’ll notice that the biggest success stories weren’t necessarily the most innovative, but they were run by the best. That said, you need to consider these:
- Make sure the entrepreneurs have extensive experience in the sector their startup is in, and one of them preferably has worked in a managerial position in a big company relating to it.
- Managing and getting startups off the ground is a learnable skill, and that’s why entrepreneurs who have succeeded before are twice as likely to succeed compared with the general public. That’s why you should look at how many businesses they’ve started before and how successful they were.
- How do the entrepreneurs’ credentials complement each other? All of them having similar degrees and similar experiences aren’t really valuable to you, and you should look for entrepreneurs who have compatible and complementary skills.
Do You See the Startup Being Useful in 5 Years?
While an idea might seem good right now, you have to take into account that startups require a decent amount of time to take off, and you shouldn’t be myopic about it. That’s why listen carefully to their pitch and try to determine how the market forces will move in the next five years and how would they affect the startup.
For example, if there is the perfect startup that provides a lot of value for truck drivers, you need to consider that the job might get automated anyways in the next couple of years making the startup redundant. Each sector has different trends and parts of it being threatened by automation, and that’s why you need to read all about it and make sure you’re well informed before investing.
Investing in startups is exciting and engaging, and there’s a possibility the company you’ll invest in will turn out to be the next Google giving you ten folds or a hundred folds returns, but those aren’t without risks, and there’s a huge chance the startup will even fail. That’s why you need to be very particular about the startup you invest in.
Checking sites for venture capitalists and angel investors like VNX Marketplace will help you learn all about new startups and their prospects.