Let’s see how investors evaluate startups.
Every investor is looking for a specific thing in a startup. Some investors are interested in a startup as a whole asset which can potentially become a source of income in the future. Others valuate every single part of the startup and study the possibilities of increasing the value of the whole project in another business model, technological chain, etc. Some of them prefer to purchase specific parts (as assets) of the startup without any care what will happen to the rest of the parts. There are also some investors who strive to highlight the most precious assets and help startups build their businesses around these assets. Anyway, in order to enlarge investors' funnel a startup should be reviewed part by part and demonstrate the quality of these parts to the maximum possible number of investors.
Today within the expert community formed in Rocket DAO we achieve the goal mentioned above conducting evaluation of the startups by 10 parameters (expert community may review this set of parameters in the future if it appears to be not relevant enough):
Resources and assets
PR and marketing
What do these parameters actually include? What can investor find useful for himself studying information about the startups in accordance with the proposed structure? Let’s have a look.
Most investors (adhered to any investing strategy) put team first evaluating startups. Even Buffet says that the team as a whole and personal meeting with its members are the crucial factors prior making an investing decision. Rocket DAO community claims that the success factor for a startup is having outstanding skills and competencies in product development, business management and technologies confirmed with professional experience and previous results and achievements.
Investors know that pivot is a normal phenomenon for a startup, which means that a startup with a strong team after several experiments will eventually find the best version of their product fitting market needs. That’s why they need to be assured in the team’s potential, know exactly what people are standing behind the project.
Many investors who have a strong understanding of the market problems usually look for the products which can potentially be highly prospective and demanded on the market. The key is to understand how relevant is the problem that a startup solves and how many clients it will have in the long run. For a startup, it’s very important to protect its product and technologies from stealing. These protection measures (copyright, patent, etc.) make out of a startup’s product a valuable asset which can be bought, sold, i.e. turned into a source of income.
Many business are created by modelling effective interactions of different market stakeholders and proving exclusive access to specific resources. Quite often development of great projects stops because of their dependence on a supplier or a b2b client. That’s why many investors evaluate entrepreneurial skills of the team by their ability to create and test new business models. After all, a startup is defined as a business with an unvalidated business model. it means that the ability to generate and test business models is an asset which investors might be willing to invest in. In the end, it is the business model, as a combination of all other elements of the business, that can turn out to be the very disruptive factor that will allow a startup to grow into a unicorn.
Clients database of a startup, already formed and constantly growing, preferably with a potential to grow infinitely (what can be proved with specific researches and analytics) is another asset that can be of special interest to an investor. This is so due to the fact that only a scalable clients database can provide that 10x+ growth. What is more, very often the clients base itself (apart from the rest of the elements of a startup) can be the most attractive asset for investors. Especially for those for whom this startup is a current or potential competitor. Or for strategic investors as well.
Startup’s product may be quite a standardised one from the customer properties point of view, it may have many products-substitutes and competitors, but it can be developed using a principally new technology. And this technology may have even more perspective variants of implementation that the one the startup team has chosen (though the team might now even know about the alternatives). In other words, their technology may solve the problems of an existing technological chain of a corporation. Many startups are purchased for the technology they created rather that for the product itself the market. Strategic investors are the buyers for this case. That’s why many startup ignore other elements of their product and concentrate on the technologies only. Technologies are not always interesting for investors, but a thorough, detailed description of the innovativeness of the technological solution increases the attractiveness of a startup for an investor.
Financial model is an integral part of a business plan. Financial model helps reveal financial potential of the project. If the model contains real input data (which can be easily verified), indicates current tracking and shows what have the income sources been so far (or will be in the near future); if the model includes the directions which investments will be used for, if a startup can calculate its valuation using widely-approved techniques, it is more likely to find a common language with an investor and to illustrate the real necessity for investments. Not the financial model itself, but the ability to compose it properly, explain the profitability of the project and describe monetization strategy are the real assets that may be interesting for investors.
Many businesses thrive due to having access to unique resources. Some of them have the best technical specialists of the country in their team, others have their own capital and office, or unique equipment and developments, some businesses have a unique client base or unique experience of interactions with the target audience. As a minimum owning a certain resource supposes that a startup will not have spend investment on purchasing it. As a maximum one should bear in mind that there are resources that simply cannot be purchased. For some reason startups don’t claim they have such resources, but the fact is that these resources can generate great income (what investors are definitely interested in).
On the venture market we can easily find correlation of the investing cycle with the hype cycle. Peak of hype for any topic coincides with the investing peak. And those who have invested in the projects in the early hype stages will benefit the most eventually. One single startup will hardly start the hype cycle for the whole industry, but it can easily spread a word about its merits to the media on an understandable language. It’s very important to keep you potential target audience, backers, investors and other interested parties on the toes, to keep their attention concentrated on you. The better the startup manages to do so, the less money it will spend on traditional sales and advertising channels to attract new customers. Therefore a new language, a new picture of the world, values and lifestyle with which a startup comes to the market investors may find as a valuable asset worth being financed.
Risks determine the discount which investors use for financial calculations while providing a startup with investments. That is why it is so important to analyze all the possible risks not only for the investors to calculate a discount but also for a startup’s own well-being since risks management system is often the source and the base for making strategic decisions. But risk determination also plays another important function. Interaction between a startup and an investor is equal to a deal, in which one strives to increase the value of the startup, and of the other, consequently, to decrease it. And when at the process of making a deal an independent arbitrator (an expert community) interferes, which assess the risks using worldwide accepted metrics, the negotiations go really good.
Proper legal registration of a startup influences the reduction of the risks first of all. However, an economically and legally optimal business operation scheme can become an independent asset increasing the competitiveness of a business. It also indicates that the founders of the business have serious intentions for its further development. Besides, this is an almost mandatory requirement for the projects at later investment stages. It is obvious that having all legal issues settled and verified by an expert community makes the dealing process between a startup and an investor much easier as the later cannot always afford to conduct due diligence by any specialized law firm.
So, now we have a clear understanding of each evaluation parameter. It’s also very important to understand that the requirements to startup on different investment stages are different.
Experts have a consistent set of criteria to evaluate your startup by all those 10 parameters. These parameters are tied to extremely objective indicators with no chance for any subjective interpretation. An expert checks the validity of the data provided and gives a score on a 10-point scale in relation to each investment round. In the end a startup receives a Rocket DAO rating and appears on a relevant section of the marketplace where many investors may notice the project already.
We are striving to make our evaluation system a unified evaluation standard used on the venture market, it means that we will do our best so that most stakeholders of the investing industry accepted reports conducted by Rocket DAO experts.
At least attention of all investors registered on the platform will be guaranteed if you pass such an evaluation. But let’s repeat one more time, there is nothing that could prevent you from going with the due diligence report to any funds and angel syndicates that you are interested in.
Experience of conducting and using Rocket DAO due diligence revealed that investors studied the diagram of the evaluation (the summary of the scores for all evaluation parameters) as a startup’s map. For instance, has strong technological background, but weak business model - this means that this startup may be of interest to a strategic investor, so an angel can invest in a startup at an early stage to sell a stake to a strategic investor later. Another example, a startup may have high evaluation scored for business model, product and market, but very low for technologies - this means that the startup has managed to find its market niche using simple, standard technologies, so it is worth being invested as an independent business.
Author of the article: Andrew Miroshnichenko.
Translated by: Angelina Dmitruk.