One of the oddities of a recession is that it is also when many start-ups are launched. More colleagues of mine have considered start-ups for the first time in their careers. If you are considering a start-up, here are four items that will help indicate their chance for success. As I am in a start-up, I can vouch for these!
ONE: Experienced
The experience is they have succeeded in the industry, commercialized similar products or launched start-ups. These are critical factors as there is simply limited room for repeated errors – so the team simply needs to have a rock solid business plan.
TWO: Large addressable market
There are loads of good ideas, but you really need to understand how big market is for the product. To attract capital, there needs to be a large market. The term ‘large’ is defined differently by every investor, but if your total market does not give you a revenue potential north of $50 million – it’s going to be hard to raise capital of any significance.
THREE: Protectable Intellectual Property
The intellectual property is essential to the value of a company; it’s what draws customers and investors. The intellectual property may be possessed at the start of a venture, via a patent or process, or built over time like a customer database. No IP is completely protected, but it should be very defensible from replication or replacement.
Here’s the other question you need to ask when it comes to the IP “Is this a product or a company?” When the IP can be extended to new markets, needs, etc. then you are more likely to have a company on your hands.
FOUR: Capital plan
Understanding the capital needs for growth is critical. A common shortcoming of early stage company business plans is an assumption that one round of funding is enough. Typically it takes several rounds of fundraising to achieve moving from product development to beta testing to initial rollout to full distribution. Every
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I’ve met with several dozen start-ups and use this simple rule of thumb: Spend a hour with the founders. If you cannot get a good feeling on these items after an hour, then don’t bother with reading the business plan or have them come back when they know what it is. (The reverse applies if you are one of the founders, before you start recruiting folks, know that they will be looking at these issues.)
If you do get satisfied, then start walking through the business plan in greater detail to see if the tactics match the strategy – this is when you’ll see whether or not they can take advantage of the opportunity.
On my website there are a couple of tools to help you understand the basics fundraising and reviewing business plans.
Good luck today!
Mark Richards