What to Look for In a Startup’s Pitch
Any startup can put together a pretty pitch deck and turn up the charisma during their pitch. While not problematic, it’s up to investors to see through the eye-candy and charm. To help the uninitiated angel investor, here are the top 3 things you should focus on when evaluating early to mid stage companies.
As legendary venture capitalist Eugene Kleiner would always say, “Invest in people not ideas.” This holds especially true at the angel level — the #1 focus should be team, no matter what industry, stage, or geography the company is operating in — the team has time & time again proven itself to be the most important determining factor for an early venture’s outcome. This isn’t like a publicly traded company where executives can be swapped out and the company moves on — the founders are the company.
While hard to quantify a team’s viability, there are a few essentials points to keep an eye out for:
Experience – Has the team been operating in the market for a long time? Did they personally experience the problem they are trying to solve? Is it clear they understand their customer? While the stereotypical founder archetype might be a young 20-something, this is where more seasoned professionals shine.
Balance – Look across the founding team, do their skillsets balance one another? Is there an expert represented on the team for growth? Product? Sales? Fundraising? Technology? Operations? Teams overweight in certain departments that fail to notice it are destined to reach limits in growth.
Hunger – Building a company is incredibly hard. There is simply no way to make it unless you have strong ambition, and a hunger to succeed. That doesn’t mean working 80 hrs weeks (at least not necessarily) but it does mean having ruthless focus and a deep desire to succeed. This should be apparent in your interactions with the founding team, go with your gut on this one.
If the team checks the box, the next thing to look for is traction. Traction is proof that the company has found a vein in the market to swim in, that they have product-market fit, and that customers want their product. More often than not, this means revenue. Do they have it and how much? How many active customers? How has it grown over time? Have they been able to charge a reasonable price for their product? Can you see how this could scale quickly?
But for many industries and ideas, revenue might not come so quickly. For freemium/open source projects, do they have an active base of users? For more mass market ideas, look for a devoted following. Look at their user engagement data, their social media, and their content. Have they built a “tribe”? do they have a strong group of devoted followers that are evangelizing what they are doing? If so, this is a very good sign.
Lastly, if they have a great team, and solid traction, you want to make sure the company is scalable. The first two items tell you they are onto something, this item tells you how big that something really is. Remember, entrepreneurship is risky and you’ll need all your investments to have high growth potential to compensate for the inevitable portfolio failures. When it comes to scalability, the following elements are key:
Market Size – Are they building a super niche product that could only service 1,000 customers? Or is there a global ubiquitous product serviceable to billions? Be sure to factor in the total lifetime value of each customer when determining the true value of their market.
Capital Requirements – How much capital do they need to scale their business? Is it dependent on a lot of physical hardware, people, equipment, real estate? Or is it just software. This will be telling for how often they’ll have to fundraise and how easily they can build up operations.
Unit Economics – This is more of a red flag area. If their current pricing strategy can’t sustain the business without a constant influx of capital, be sure that there is a clearly defined path to fix that. It’s common for startups to burn cash, but if they’re the only response to poor unit economics is that they’ll “fix it at scale” then find some more future-minded founders.
Appetite for Growth – What is the founding team’s vision for the business? Do they want to be the next Google, Amazon, Apple, etc. or just build a great cash-cow lifestyle business? Either option is valid and can be very lucrative, but you need to know what you are signing up for.
At the end of the day, all of these questions are to determine two things:
- This team is onto something with real market potential.
- When competition & the pressures of growth come, they’re the ones to weather the storm.
As always, if you’d like more advice on how to sift through pitches and pick the best companies to invest in, don’t hesitate to reach out to us, we’ve helped hundreds of investors fine-tune their strategies, and we’d love to do that for you as well.