Evaluating early stage startups goes beyond numbers for investors. They need to gauge success potential across varied dimensions. Here, we distill down the key aspects that investors consider while deciding on whether or not to invest.
1. Visionary Leadership
A founder has to set the north star in order to attract the right kind of stakeholders in terms of partners, employees, etc. Investors evaluate the founder's vision, strategy, and disruptive idea, but also ensure that the same balances long-term thinking with pragmatism. People can have the greatest of ideas or strategies but ultimately it all comes down to how everything is being executed.
2. Skilled and Aligned Team
During the initial stages, it is usually a single founder but as the company keeps evolving, having a skilled team is better. Investors seek cognitive diversity - a highly skilled team with technical, business, and industry skills that not only complements the founding team but also each other is crucial.
"Just like it takes a village to raise a child, it takes multiple people to build a successful, viable, long-term company," says Venkat Raju, Turbostart's Global CEO.
3. Scalability Signals
The first criterion is product-market fit, that is, inbound interest on the part of customers seeking the company’s product as well as the ability to meet demand. Consecutive reduction of sales cycle and easy high profile hires are other factors that help seek investors’ interest.
4. Sustained Incremental Growth
Short term spikes in numbers can happen due to seasonal factors, and investors work on separating these from long-term sustained success. They evaluate monthly recurring revenue, net revenue retention rate, customer lifetime value and similar patterns for predictability as well as scalability in terms of how the company is operating.
5. Holistic Customer Insights
From investors’ perspective, it is important to map the entire customer journey to value realization. Founders should go beyond vanity metrics to user behavior analytics, and attain real-time feedback. Customer success can be an important aspect here - it indicates how well the customers are liking the product, based on re-signing of contracts.
6. Improving Unit Economics
Gross margins by product line and customer cohorts over time indicate sustainability. Startups need to have an understanding on the amount an ideal customer would be willing to pay for a particular product and how good the margin would be.
7. Right Growth Indicators
Growth indicators differ on the basis of the stage the startup is at. For the early stage, investors typically assess TAM potential and validate risk assumptions. For the growth stage, they analyze operational metrics like sales cycle conversion and teammate productivity.
8. Evidence of Traction
When evaluating traction, investors focus on a startup’s track record, and this is not just in terms of revenues. They also focus on customer retention, reorder rate, partner satisfaction, market potential, forward-looking business plans, and so on.
In summary, startup evaluation is based on stage-relevant analysis of the founder's strategic vision, team quality, product-market fit evidence, growth sustainability, customer understanding, financial health, evolution milestones, and traction benchmarks. While every investor weighs criteria differently, these are some qualities that investors specifically look for in startups before they invest. Entrepreneurs who can check these boxes show they are positioned to provide returns for investors while disrupting an industry.
