Author: Andrew Miroshnichenko, Head of Experts, Rocket DAO
In the last decade, a startup movement has intensified significantly. There are lots of reasons for that: both significant increase of the amount of investments in the world economy, and deep understanding that in an innovative economy the profit upturn on investments is only possible in the sphere of disruptive technologies.
The activity and the quantity of the participants are intensifying on the startup market. Important to mention that one startupper is competing with another startupper to get the best investors, and vice versa investors are competing with each other for the startups. Both parties are spending too much efforts and useful resources, building up their funnels for startups and investors. What is more, each startup and investor are imposing their own requirements to each other. This makes the creation of those funnels even more complicated.
In order to resolve such a problem, there exist third party products which standardize the whole cooperation procedure between startups and investors. In the framework of the generally accepted procedure for the presentation of information and the startup assessment, the startup would not need to write the numerous business-plans and endless number of personalized applications to the funds; so funds wouldn’t need to operate the enormous amount of fragmented information about startups to choose the best ones.
The task of the information standardization about startups is quite ambitious as the investors have various investment strategies, different geographical, industrial and other preferences. However, a long way to go awaits for the one, who would decide to create a disruptive technology in the venture branch.
In this article, we are going to discuss a short version of the evaluation and how suitable it is among the vast number of startups, those startups which are first to grab investors’ attention.
Imagine that in the marketplace, there are a significant number of startup profiles (or cards, as you like). These cards contain only the most important information. But there are thousands of such cards on the platform. The startup aims to grab investor’s attention, but sometimes it happens that the startup doesn’t understand what exactly may be attractive to the investor. So to say, Public Due Diligence was developed on the Rocket DAO platform specifically for these purposes. However, it costs a lot, and, more importantly, the majority of startups don’t designate and test a range of parameters which are included into their business plan, so they cannot be learned in detail. Moreover, the Rocket DAO statistics show, that during the process of Public Due Diligence questionnaire, the startup accelerates itself in attempts to answer the questions. Usually, it happens that on the last stages (which is Rocket DAO Public Due Diligence), startups may make critical mistakes, which could have been avoided on early stages — the stages of market hypothesis formation and testing.
The solution to this situation Rocket DAO expert community considers the creation of a short, preliminary evaluation of the startup’s business model. This pre-evaluation includes team, product, business model and future market perspectives of a startup. A startup should provide extended details to the basic info presented in its profile and give links to the additional information; experts must assess a startup by these criteria and give it a point from the scale of 10. ‘0’ implies that the startup doesn’t have something required by a parameter, whereas ‘10’ stands for the startups at the B Series which are already expanding on the global market.
Here we are talking about 2–4 questions which an expert should answer about a startup. Other experts may wether join and agree with the assessment point, or suggest and justify the alternative variant.
Perhaps, the team is an essential part of every startup. Many experts won’t even try to assess the team if they don’t examine first team-members’ experiences, scientific background and psychological characteristics. Thus, any quickly made preliminary team evaluation will be imperfect and superficial. That’s why even the most experienced experts in the field of team assessment do not try to give such kind of assessments.
However, among the enormous number of startups, it is necessary to pick up those who are truly valuable and should be paid more attention to. So how is it possible to solve the contradiction between the necessity of team evaluation and grading, and limited information to work with, the analysis of which allows estimating the startups’ future perspectives.
After some hours of fruitful discussions, Rocket DAO expert community agreed on the method which allows analyzing the team effectiveness based on a set of formal requirements. This method is used in the Rocket DAO Public Due Diligence; however, it’s best to use for the quick evaluation. The main idea of this method is that the most perspective startup is the one with a team, which has the real experience of launching successful global projects or achievements proving acknowledged in the expert community team members’ skills in the given field (Nobel Prize even). Admittedly, not all of the unicorns were created by the people with an outstanding previous experience, but let’s be honest, it is more like a rare rule exception. What is more, such startups should have other strong sides like a product, business model or rapidly changing market, which are analyzed in other parts of the evaluation.
In case if an expert needs to get more information about the team, he/she can quickly check the social networks as a great bit of information people store there.
Whether a person has the experience of business projects’ and initiatives realization as well as the person’s role in the process of realization — it is quite easy to figure out, and if not the reliability of this info, then for sure — at least the correspondence to the assessment requirements.
While conducting preliminary evaluation, apart from the business model experts assess product, team and market of the startup. To do this, a startup answers a number of questions quite typical for this kind of documents. Here are some examples of these questions: “What is the uniqueness of your product? How many potential users does your product have?” etc. Then experts make their conclusions about: correctness of the answers, the market state, the quality of the business model and other objective characteristics of the startup.
All these sections are aimed at assessing commercial perspectives and entrepreneurial competencies of the startup first of all. It often happens so that early-stage startups believe that creating a working prototype of their product and demonstrating the efficiency and effectiveness of the developed technology are number one priorities. Sure, well-performing technologies are essential for a startup, but don’t forget that technologies — are not business. That is the reason why we do not assess technologies in preliminary evaluation (hardly can somebody assess them quickly). So, preliminary evaluation is concentrated on the market hypotheses of the startup.
Based on the experience of previous evaluations, at the preliminary evaluation startups many startups are wrong at specifying the current investment round and the amount of the investments needed. Some of them underestimate the current development stage, others — overvalue. Consequences of overvaluing are evident. But what about undervaluing? It can lead to underfunding of the next round of investments, lack of resources to achieve the goals of the next round and some more bigger problems. That’s why it’s so important to create an approach letting define the investment round using some objective characteristics.
If in Rocket DAO Due Diligence investment round criteria are counted in every evaluation parameter, then in preliminary evaluation the round can be defined only with respect to the product lifecycle.
The criteria which help define investment round in this case are some specific characteristics of the product lifecycle. Each of the statements (read conditions) stands for a certain investment round:
A lot of experts who are considering taking part in assessing the startups by the Rocket DAO expert community standard ask a logical question: why do we need real experts, if the expert’s job consists only in establishing the correlation between a startup and this or that criterion? In which way, an expert could share those pieces of knowledge that the startup would require? This question is crucial because that’s why we are developing our expert community; knowledge and wisdom of every member of the expert community are always more valuable if they are being accepted by other members, than the experiences of a single expert.
Besides, if in Rocket DAO Public Due Diligence the expert’s job mainly consists of checking the reliability of the project’s data and establishing their compliance with the requirements, however, it can be done only in case when a startup has determined its business-model. Basically, in the early stages of discussion of its hypotheses, the startup needs a possibility to look on the chosen strategy from different angles or in other words by various experts, with diverse knowledge and experience.
Shortly speaking, to make the startup evaluation as if it is conducted by the whole community, and vice versa, to give a single expert a possibility to share his or her individual opinion about the startup, Rocket DAO came up with this formula:
On the one hand, by using such a method, an expert adheres to the generally accepted assessment scale for the whole Expert Community. On the other hand, the Expert receives his own space to express personal opinion about the startup.
How is it possible to make up that more than one expert community representative would be able to speak up about a startup; that different points of view could be expressed; that the final assessment was the most possible complete and adequate?
Rocket DAO platform creators have a solution.
Random expert on the platform can join to the startup assessment; still, this expert should specialize in a specific parameter. Either he joins to the first expert who has already made the assessment and adds his suggestions, or he disagrees and explains why. In such a way, there is room for the discussion on the platform as people are sharing different views about the projects. At the same time, mutual approval of the first experts’ assessment following the 10-points scale gives an idea of the agreed opinion of the expert community.
A person who invests his or her own money in the startup, should get a handle of strengths and weaknesses of the projects seeking investments. On the one side, quantitative startup evaluation will show whether this or that startup is worthy of paying attention to it. On the other side, if a startup has already attracted interest of the investor who now wants to get more details about the project, he may simply check the expert discussion about this very startup and see it from the experts’ point of view. Finally, having read the forum, getting to know different expert points of views, the investor can decide whether this startup is worth investing or not.
Talking about the startup, it gets the essential — a variety of precious pieces of advice, additional information about where can they get more experience, support and recommendations from the international expert community. The startup team can enhance their weaknesses and even improve the strengths taking into account the evaluation and the experts’ assessment.
Learn more about Rocket DAO preliminary evaluation and study the samples here: https://rocketdao.io/evaluation/landing/startup
Translated by: Dmitro Basok and Angelina Dmitruk.