What every angel should ask before investing (1)
Its easy to get bowled over by an innovative idea or an entrepreneur that brings a flood of passion to the table. In many ways angels are fighting a current to maintain their objectivity. Multiple meetings are suggested before taking the plunge and making an investment. Leverage the your angel network as a sounding board if needs be. When assessing startups make sure you cover the important aspects of their business: A General Overview, Market, Team, Products and / or Services and Competition. Follow up meetings could cover the following details: Their Marketing, Customer Acquisition Strategy, Progress to Date, Risks, Intellectual Property, Financials and the Financing Round. Here is a list of questions in each of the categories identified above. General Overview Getting a general overview of the business is an important first filter. It will help you get a feel for whether the business is something that you’d like to get involved in and whether it has the return potential (financial or social return) that you’re looking for.
What does the company do?
How far along are you? This relates to the business as a whole and would include feedback on the product, team and customers.
What big customer problem does it solve? Is this a major pain point, is it popular, is it urgent?
What's the business' vision, where is this journey going to take us?
Where is it based*?
*Its important for you to be close to an early stage business. There are always fires that need to be put out or hurdles you need to help them overcome. Doing this over the phone or online is not always possible. Market A young business is always making its way in to a market. By the time you chat to startups they’ll be talking about the market potential rather than their current share. Entrepreneurs are inherently optimistic and as a result may tend to overstate the size of the market. Apart from asking these questions, its important to also do your own research.
Who is the customer? Often solutions differentiate between users and paying customers.
How are these customers currently solving this point point?
How big is the market opportunity?
What is the total addressable market (TAM)?
What is the serviceable available market (SAM)?
How quickly is this market growing?
What percentage of the market do you plan to get over what period of time?
The questions listed above relate to top-down research. Bottom-up market sizing is often more time consuming but generally more accurate. This considers the number of distribution channels or partners and estimates of how much of your product can be sold by each partner. These estimates are usually based on an extrapolation of the existing sales funnel.
Team This is the most important aspect of any startup. There are a few universal truths in life, one is that every startup will face challenges. It’s the team that will determine if and how the startup overcomes these challenges.
Who are the founders and key team members?
What relevant domain experience does the team have?
Are you outsourcing any functions?
Why is the team uniquely capable to execute the company’s business plan?
What motivates the founders and how are they showing their commitment to the business? Do they own the equity or are there other shareholders?
What other business interests do they have and are they sufficiently committed to the business?
How do you plan to scale the team in the next 12 months?
Products and / or Services Often getting a succinct description of the product or service is a challenge. Entrepreneurs tend to be extremely passionate about what they do – this is necessary because the odds are stacked against them. It also means they struggle to stop talking about what they do.
Why do users care about your product or service?
What are the major product milestones (past and future)?
What are the key differentiating features of your product or service?
Can you provide a demonstration of the product or service?
Competition Understanding the landscape is imperative! You’ll often hear, ‘we don’t have competitors’. This is a poor response. Either the startup has not done enough research or they need to broaden their search – its important to remember that startups are solving a need (customer pain point). Perhaps they are solving the need in a different way to incumbents but they need to be aware of other companies solving the same need. If there is really no-one doing it there may be no market opportunity. Its rare that a startup is solving a new need, in a new market, with a new product.
Who are the company’s competitors?
What will give your company a competitive advantage?
What advantages does your competition have over you?
How do you compete with respect to price, features, and performance?
The second part of this blog covers the remaining categories.