Looking to invest in your first startup? Before throwing money in the next blockchain-powered social network, here are 5 essential things you should always look into if you are considering to invest
1. Why did the founders pick this idea to work on?
Why they are doing it, are they really passionate and determined?
Building a company is hard and enduring and if you are not passionate enough about solving the problem, you are most likely to quit at the first few hurdles. This first question could be really paraphrased into: “Can you work on this idea for a substantial part of your life?”.
2. Have they embraced customer-driven development?
Ask the founders how many of their customers they’ve personally spoken to, how they’ve tested their prototype with their customers, and how they enthusiastically seek and incorporate customer feedback in each weekly update. If the company culture isn’t based around embracing customer feedback, that’s a sign they may well be building something, with your money, that isn’t meeting a real need.
3. Who has tried to solve this problem before?
As CEO at Pushapp I personally talk to at least a dozen startups a week and I’m often surprised that even though I know little about their sector, I can name a bunch of competitors they’ve never heard of. So as a consultant and possibly as an investor, I like to research their competitors and then ask the founders how they’re different. And if I know of competitors that they don’t, that’s a bad sign.
4. Look for momentum
Everyone has their own definition of momentum (user numbers, revenue, channel partners, biz dev deals, whatever). But the reality is that when we say that we “need to see traction”, we really just mean that we’re not ready to invest in that startup. Why? Because evaluating founders performance and capabilities is HARD. Looking for traction doesn’t necessarily has to be related to revenues or users, it is really about understanding whether the team is able to move the ball forward. Try to meet your founders as early as possible in their startup journey and keep track of their progress. Look for developments over time, as momentum will be easier to judge than a single data point. To get continuous updates from your prospects, I recommend our founder friendly reporting tool: Angeldeal
5. Research their use of funds
As an investor, you need to understand what, why, and how the startup intends to spend the money. Sadly, so many founders look for investments without first assessing their needs. Also, try to understand if the funds that the startup is raising would be enough to accomplish important milestones that could help the company to either become profitable or to raise additional rounds of financing.
Bonus: Does it matter to you?
Finally, consider whether the company is doing something which matters to you personally. If the company is working within an industry you understand, there’s a bigger chance that you will be able to contribute to the success of the company, both directly as a client by giving the company advice, mentorship, or introductions; and by shouting about the company to the relevant audience that is your network.