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Evaluating traction, team, and product
Today we’re going to cover some tips on how to evaluate potential startup investments online. We’ll briefly discuss three of the most important factors to consider when it comes to private startups.
“Traction” is a measure of how much progress a startup has made. Traction often refers to revenue, but can also come in other forms such as active users or downloads.
When it comes to revenue, startups with millions of dollars of annual revenue can be hard to find at the early stages. With startups, investors typically focus on the rate of growth. For example, $10,000 in monthly revenue may not seem impressive at first glance. But if that $10k revenue is growing 15-25% month-over-month (MoM), in a few years the business could be doing $1 million+ a year in revenue. If a company hits the million-dollar-a-year mark, and can still maintain a significant growth rate, it doesn’t take long to create a potentially lucrative exit scenario.
Of course, many startups don’t have revenue yet. In these cases, you have to evaluate the company’s potential using other methods. In general, investors should expect to pay more for startups with significant traction. Look for startups that have a sustainable business model, which can continue to grow for years to come.
Evaluating a startup’s founders online may seem challenging at first. After all, you can’t meet them in person. But there’s a lot you can tell from afar. For example, some professional investors like to back founders who have previous startup experience. Experienced entrepreneurs know the challenges of starting a business, and are prepared for the ups and downs of startup life.
And if you find a startup with founders who have successfully built a very large business, or sold a company for a profit, that can be a great signal. Many venture capitalists also look for founders that have deep experience in the industry the startup is in. These founders understand the industry and its challenges, and are looking to solve a big problem within it.
It’s also important to look at team dynamics. Some professional investors look for founders who have known each other for years, and preferably have worked together before. This shows that the founders know each other well, and believe in each other’s skills and capabilities.
The third thing we’re going to cover today is evaluating a startup’s product(s). Whether it’s a software product, or a consumer good, your goal should be to try to get an idea for how well it’s working.
Look for online reviews and customer feedback. And whenever possible, try the product. If you aren’t familiar with the startup’s industry, ask someone who is for their opinion on it.
Of course, there’s more to evaluating a startup than traction, team, and product. But in general, these three factors are a great place to start your diligence process.
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