Welcome to this blog post about how investors evaluate startups before acting further…

To begin with… It is important to know, that investors all act differently…

There are some investors very metric-oriented and only look at the numbers… What is the sales number, and what is the customer acquisition cost, etc? You know…

And then there are other investors who bet on the hyper-growth… For example, if a startup has gone from zero to 50.000 users in two days they predict, it can go to 5 million users without making any money… But grow faster… And hitting a home run… And those types of investors are OK with it the burning money…

But still, these two kinds of investors have a common thing… And it is betting!

One type of investor is betting on financial principles and the other is betting on the anticipation of hyper-growth…

So the first thing you need to know is YOU… What type of investor are you?

OK after we said that…

How to evaluate a startup?

Evaluating a startup depends on data… And the data comes from the startup documents and the founders’ performance in pitching their ideas…

I assume as a seed investor you will have access to the startup pitch decks… You can reach the information by attending startup meetings, being a member of angel investor networks, or following certain websites… Such as AngleList.co or Gust.com…

If you are a well-known investor the data comes to you as well through social media channels or your email…

Even though all investors look for the product-market fit and the good tractions… Maybe the number one reason they choose to invest in a startup is the founders themselves…

As an investor, you must trust and believe that they can overcome hard tasks with a passion…

Founders must be resilient both mentally and physically… Because it is a bloody tough journey…

Most entrepreneurs are working seven days a week… An investor always wants to work with people who can handle the pressure while they are creating their startups…

The technical side of evaluating is kind of interesting as well… If the startup has traction, where should you look at?

In most cases when startups looking for seed investment there are not so much data about their business… It is the nature of seed-level startups…

However, if the startup is running their business for quite some time… Then they may create sufficient data to investigate…

First… Looking at the annual growth rate is quite important… Seeing a linear curve going up is very pleasant…

This is usually a good sign… It shows that there is a lot of demand for the product, a lot of interest so the company is growing very quickly…

Spending on sales and marketing vs revenue is one other important point to have a look at…

Typically you want to see the magic number for this ratio is “1” maximum… If the startup is spending 1 dollar on marketing it is expected to create at least one dollar in revenue…

So that is the reflector of sales efficiency… This also means that the startup caught the growth but they are doing it naturally…

As an investor, you also have to look at the gross margins of the startup… Check the COGs (cost of goods)… It will tell you how healthy the sales process is…

One other point is… If the startup can manage its cash flow…

if you can’t manage your cash flow… it basically means that the company is out of business… Check if the founders are doing good on managing their startups’ cahs flow well…

Lastly, calculate carefully the investment need of the company… Be sure after your investment the cash will last for the startup for at least two years…

Growing and finding a bigger investment takes time…

Now… Let’s sum up how to evaluate startups…

1- Does the startup have its documents ready?
2- What are their unique offering? Who are their competitors?
3- What is their business model?
4- How big is the market and is the market growing?
5- Is Startup investment needed in your ticket size range?
6- Are there other investors interested in the Startup?
7- Do you think you can work with the team?

Lastly, I want to say It is always better to invest in markets that you have experience with…

It is not a strict rule but, evaluating the product-market fit is more accurate and takes less time if you have previous experience in that market…

As an early-stage investor, If you have any investment-related questions in your mind feel free to contact me…