The following answers are provided by members of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
How Customer Focused They Are
I ask every founder, “How many sales calls did you make in the last week?” If founders spend more time perfecting features than speaking with potential customers, their focus is in the wrong place. They might have a great product. It might look like a business. But without customers, it’s not a business. If the founders don’t understand this, the best sales team in the world can’t help them.
How Consumers Are Getting the Product
Peter Thiel, famed investor and entrepreneur says: “Most businesses actually get zero distribution channels to work. Poor distribution (not product) is the No. 1 cause of failure.” Most will tell you to focus exclusively on the product, and undoubtedly that is important. But we live in a distraction-constant world, and so the company needs a very thorough answer to customer acquisition.
How YOU Can Contribute
When investing in a startup, it’s important to feel that you can contribute something more than just money. We like to invest our time and money in partners where we have the opportunity to contribute our knowledge and connections to help that company/platform flourish. It’s a win across the board, and it makes you feel involved and responsible in the company’s fate.
A Realistic Valuation
If a valuation is outrageous, it’s more than just a sign that a founder has overvalued his or her startup. It could also be a sign of dishonesty, lack of business acumen or a failure to understand their target market. Only consider startups with realistic valuations, and you’re more likely to choose a company with a realistic understanding of how to become profitable in their market.
What Their Exit Strategy Is
What’s their exit strategy? What are their long term plans and goals? Do they envision a finish line? Obviously you want to invest in a management team that’s committed to the venture over the long haul. But hopefully, they’ve also thought ahead a few moves and can demonstrate some ideas as to how and when you may be able to see a return on your investment.
How Scalable It Is
A strong team and original idea can be a dime a dozen; the reality is that a startup lives or dies by their ability to scale their business. Sometimes the core question is whether the business is actually scalable. Is the idea ephemeral? Is this a product or service that will still be relevant and have room for growth in the next 10 years?
How Driven Their Founders Are
You’ve heard the saying: Plan B is a dream killer. This could not be more true than it is for a startup. You need to make sure the founders are going to do whatever it takes to make the company successful. Be careful of how much they need from you, as you want to invest your money, not yourself. Then, pay attention to what they perceive as obstacles (personal) vs. money issues (easily resolved).
How Much Traction It Has
Many startup ideas are just that: ideas. Look beyond the presentation of the idea. Have the founders actually made any progress on the business? Have they created mock-ups of their vision of the software? Have they tested response to their target market to gauge interest of their idea? Have they interviewed real potential customers? Do they have a list of qualified hires? Look for traction.
Whether It Makes Financial Sense
Other than the quality of the team, how do they handle money, particularly if they have raised money in the past? It’s a very important indicator to understand how they’re burning money, on what and whether they’re being unreasonably profligate. It says something not only about the startup but more importantly about the team—which is, as I said, No. 1.
How Viable Their Market Is
At the end of the day, market viability is the only thing that really matters. Is there room for the product in the market, and will people actually demand it?
How Their Team Reacts to Problems
It’s a cliché for a reason, but the team is what will make the business a success. Things will get hard, problems will stack up and everyone will have doubts. Sometimes you can ride a clown car into a gold mine, but I would not build a strategy around that approach. Find a team that has a track record of doing what they say they will do and is pursuing a problem worth solving.