5. Evaluating Startups for Investment (George Deeb)

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George Deeb joins Nick on the Full Ratchet to discuss investment criteria & evaluation of startups including:

  • George DeebWhat key questions should a startup be able to answer, that precedes evaluation (ie. If a start-up can’t answer these questions, don’t waste your time evaluating)?
  • At a high-level, what are the categories that an investor should consider when evaluating?
  • In general, do you subscribe to a qualitative or quantitative decision process?
  • Are there any “red flags” that superceed all other evaluation criteria?  In other words, if a start-up sets off these red-flags, you will avoid investment no matter how strong all other evaluation factors are?
  • In general, do you subscribe to the philosophy that an investor must see a certain number of companies for every one that they invest in?
  • What is “the fast no” and why is it important?
  • How does one speed up their evaluation process and make faster, more-decisive decisions?
 
Direct-audio:  http://bit.ly/1ooHq0f

 

SoundCloud:  http://bit.ly/1He8w6N

Guest links:

 Key Takeaways:

 
 1- When considering a startup for investment…
  1. All starts with “Team.”  George would rather have an A+ team building a B idea than a B team building an A+ idea.  This is a key point that comes up time and time again as I talk with professional startup investors… and it can’t be stressed enough.  
  2. Market- Is the startup going after a market that is big enough to create significant opportunity?
  3. Competitive Set- Are there other players, doing similar businesses that have strong venture capital funding?
  4. Revenue Model-  Is there a way to monetize the business?  And have they tested the customer acquisition model for revenue to insure that there is a profitable way by which they can acquire new customers and make money doing so.
 
2- The Stages of Development
  1. Piece of paper -> Product
  2. Product -> Proof of Concept
  3. Proof of Concept -> Scale

Depending on where you’re at in the Stage of Development, this will determine your valuation…  so often the piece of paper ideas will have a much lower valuation than startup that has a product built and has found proof-of-concept in the market.

 
And to recap this term “Proof-of-Concept.”  George defined it as…  proving that there is customer demand around a particular idea.  So he mentioned having a pipeline of leads that are being converted into customers and ultimately something that proves to the investor that customers are interested in the idea, they like it well enough to sign-up for it and the entrepreneur is sophisticated enough to market it.
 
 
3- Deal Killers
 
We talked about what’s absolutely necessary for a starutp to be able to articulate before you spend time evaluating…
 
Need to show an investor what they care about, which is how much of a $ return they will get.  A startup needs to have a clear roadmap to a 10x return or higher… b/c the startup investor understands that they will only have a handful of successes out of every 10 investment they make, so the successes need to be large in order to makeup up for the losses and still provide an outsized return on the entire portfolio.  In general it seems that there’s two schools of thought when it comes to this.  Some angel investors dislike when starutps talk about exits (ie. selling the business for a return), b/c it makes them look like they’re not focused on the present and their main motivation is to make a lot of money.  I can see where angels are coming from when they say that, but I honestly think that startups discuss it b/c it’s the expectation.  You always have to know your audience and in this case the startup audience is an investor that needs to be confident in a 10x+ return..  so from my standpoint there is definitely a place in the pitch for startups to discuss how the investor makes money and what they think are potential exit strategies.
 
 

 Tip of the Week:  If you Build it, will they Come?

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Randy

@JavierMBGJ Had no idea @TheFullRatchet existed. This is exactly what I've been missing!