The number of Startups in the U.S. surged in 2020, growing at a rate not seen in more than a decade, according to data from the U.S. Census Bureau. Thanks to regulation crowdfunding, millions of Americans now have the opportunity to invest in companies in their early stages, rather than waiting for them to go public or missing out entirely.
If you’re new to this asset class, welcome! Let’s look at seven questions to ask when evaluating a Startup; it’s different than investing in the stock market.
1. Do I see real market potential?
When you consider information Startups provide along with your own research, do you see the problem they’re addressing and how their solution can meet a need in a way that’s new or better than existing solutions?
How large is the total addressable market (TAM) for this solution and is it growing? You should be able to find this information easily within the funding campaign pages on Fundify and you can fact check with other online sources.
Consider the current size of the market as well as what it may look like in 3, 5 or 10 years. Remember that Startup investing is a long-term investment strategy.
Is the market growing? As the saying goes, a rising tide lifts all boats. That doesn’t mean that a company can’t grow in a more established market or that a booming market ensures success, but industries of growth may provide more opportunities for a Startup.
New, novel or next-gen ideas are often referred to as “blue ocean,” for which there may not be much available on which to project market growth.
2. Has the startup attracted a strong team that’s capable of executing?
One of the leading indicators of Startup success is the track record of their founding team. Have they done this before? Any prior success “exits,” whether by acquisition, merger or IPO? Past success doesn’t guarantee future outcomes, of course, but you may want to pay close attention when you find a “serial entrepreneur” with a record of success.
Consider how the skills and experience of core team members prepare them for achieving the mission. Are the essential business functions covered by in-house members or outsourced resources?
Can you sense the team’s passion and commitment to achieving the vision they’ve shared? Are core team members full time, or are they part time with much of their focus elsewhere?
If their business relies heavily on technology (like most these days), consider the tech team. Has the Startup successfully recruited tech pros who could have secured higher paychecks at a more mature company but took a chance on the Startup because they believe so strongly in its future?
Does the team seem to work well together? Are there multiple core contributors or does the business depend mainly on one person? Consider what happens if that one person leaves.
3. Does the Startup team understand their competition and have clear differentiation?
The Startup team needs a solid understanding of the competition in order to objectively evaluate their own solution and spot market opportunities. You should see evidence of this understanding within the funding campaign pages. Startup legend John Nesheim refers to this as creating an “unfair competitive advantage” or “defensible airspace.”
The Startup should clearly state their unique selling propositions (USPs) – what makes their product or service different and better. It’s not enough to simply jump into a hot market. To gain and retain customers, Startups must have a compelling advantage over existing solutions.
Having a couple of competitors, either existing or in progress, is often a sign of validation that there’s market opportunity or need that others see and are pursuing.
Another distinction to consider is how many indirect or “near-delta” competitors a Startup has. Those are companies that might be able to quickly reproduce or replicate a product or service, given their size and resources. The most important factor is how many direct “rivals” a Startup may have. The fewer, the better.
Patents, trademarks and copyrights are good signs of unique intellectual property.
4. Can this business scale?
Startup investing gives you the chance to support missions you believe in, but most Investors hope for a future financial return as well.
In order for a Startup to achieve a return for Investors, it will have to scale and reach a successful exit.
Considering the current solutions offered by the Startup, can you see how that could grow to a broader solution? If revenues started flying in, could the Startup adapt business processes to meet that demand in a capital-efficient way? Are systems automated or does each step require an employee’s manual time and attention? Think about where the company may have “single points of failure” that would limit rapid scale-up or scale-out of their business model.
Look for flexible business processes and the ability to adapt to a growing or changing market.
5. Is it a product or a company?
This is another key consideration related to a Startup’s potential to scale and capture a sizable amount of TAM. Some companies create “gadgets” that may be cool, but they’re unlikely to make a major market impact or credibly project hundreds of millions in future revenues.
And while new or niche products or services may be compelling and their Founders may be mega-passionate about them, building a scalable company typically takes more time and resources than developing, launching and distributing a single product or service.
Building a company requires a clarity of vision to produce an eventual line of products or services based on a scalable -- and potentially novel -- infrastructure, tools and specialized teams.
Scan for Startups that understand and communicate a plan to expand or extend an initial product or service into a product line or suite of services over time. And possibly offering an all-new business model as well.
6. Does the Startup have enough runway?
Look at the amount of cash the Startup has (or will have upon successful completion of a crowdfunding campaign) and see how long that will fund operations (the "burn rate" or “run rate”). Will that give them enough time to finish development or complete other key phases? How soon will they have to raise money again? When do they expect to see revenue or even profitability?
There’s no one right answer to these questions, but the information gives you a more complete picture of the investment opportunity.
7. What would a successful exit look like?
A Startup looking for early stage Investors should be able to tell you what a successful exit might be for them since that’s the point at which their Investors may realize a return.
Are they trying to grow large enough to attract an acquisition? (According to TechCrunch, mergers and acquisitions are the most likely successful exit.) Perhaps they’re aiming for an eventual IPO like recent Startup success stories Uber, Airbnb and DoorDash.
Equity crowdfunding enables millions of people to invest in Startups for potential gains if the Startup succeeds. Startup investing is risky, and it’s important to conduct your due diligence to ensure each investment fits with your strategy. Learn more about equity crowdfunding here.
Investors on the Fundify platform can access comments made by Fundify Industry Experts who have reviewed qualified Startups. When available, those comments and detailed Startup information are accessible on the company’s offering pages on Fundify.
Explore the Fundify Marketplace to search for opportunities that you may meet your criteria as you consider these seven questions.