8 Ways to Identify the Perfect Startup Investment

By Michael Whitehouse

If you are considering investing in a startup company offline or online with platforms like 1000 Angels, a private investor network that connects startups with investors, the sheer number of what’s available can be both daunting and comforting. On one hand there are so many startup founders out there that it is very difficult to identify which ones have the best chance of success and producing a profit for investors. On the other hand, the large quantity can be looked at as a sea of opportunities just waiting to be explored.

Photo credit: http://www.valley.bc.ca/

Photo credit: http://www.valley.bc.ca/

But how can you identify the right investment opportunity for you when facing such an onslaught of possible avenues? For even the most experienced of investors this can prove difficult. There are many startups out there; but the key is separating those that meet your investment criteria, from those that do not.

With this in mind, let's take a look at 8 key aspects of the “ideal” startup. Most startups will not meet all 8 criteria, but these are considerations when making your investment decision.  There is no guarantee that an investment will meet any of these objectives, rather objectives that you as an investor want to think about when considering an investment.

1. Consumer Need: An important aspect of any startup is whether a resulting product or service will sell or solve a particular problem.  A slick business plan and charismatic founders will help, but the bottom line is that if the product does not sell and generate revenue, it is useless to you as an investor. Of course no product or service is a sure thing, but what is certain is that only those which fulfill a demand have any chance of making it. Does the startup offer something people genuinely want? Will it solve some need which is not already being met? If the answer is yes, then there is a chance that such a startup could prove successful when finally launched.

2. Exit Strategy: Does a startup have a clear exit strategy in place? In other words, does the business have a definitive timetable or pathway towards returning an investor's money alongside an agreed portion of generated revenue? It's important that you as an investor know how you are going to make your money back with a suggested timetable in place. Without this there is little point providing financing because there is no direction or plan to help you generate returns.

3. Clear Ownership: As an investor you must have a comprehensive understanding of who owns the startup and all of its intellectual properties. If there is any question regarding patents, copyright, or ownership of assets then investment should be withheld until those issues are legally settled. If they are not then your investment could prove worthless.

4. Management: Depending on how “hands-on” you wish to be as an investor, having a reliable and astute management team in place to oversee a startup is essential. Without this, such a project cannot thrive, operate efficiently, or meet its goals on time. In some cases a new management team can be brought in as part of an investment deal, but founders often prefer to keep their existing talented team in place. Some startup founders have great ideas and big dreams, but if they lack the administrative talents to make them happen, you as an investor could pay a hefty price.

5. Sustainability: Some startups by their very nature may be “flash-in-the-pan.”  In some circumstances this might still prove to be a solid investment should there be a swift exit strategy in place, but ideally a startup should be able to demonstrate that it can be sustainable; a brand which will generate profits for many years. If the startup cannot demonstrate sustainability, then there won't be many investors willing to purchase that equity from you, at least not in a way which will maximize profits.

6. Standout: Unless uniquely innovative, the chances are a startup will have competitors. These could already be operating or trying to launch into a new niche at the same time. A startup must therefore demonstrate why it stands out from the crowd; showing why it will be a strong competitor to other similar companies within that niche. If the startup cannot separate themselves, then it may not be wise to invest in such a project.

7. Relationship: Startup founders must be willing to work with investors and be communicative at all times. A project might have a great idea at its heart, but any working or financial relationship which may become fiery, destructive, or stressful, may not be worth investing in. There has to be a mutual respect between founders and investors, each knowing their role in the startup and willing to build constructive relationships throughout.

8. Expertise: If a startup is the product of an accelerator program, incubator group, or can access the advice of market experts, it is may start with a solid foundation, This knowledge can be used as a safety net, providing peace of mind for investors knowing that advisers with the relevant expertise and skill-set are available to help steer the startup in the right direction, but does not guarantee execution by the company.

As stated above, most startups won't possess all of these facets, but a strong combination of a few of them may produce a successful investment opportunity.