Evaluating an Opportunity 101

A company with a mediocre team but a great market position might still be worth investing in. Of course, a great team and a great market is the key to real magic.

Try first considering the startup’s market, and then the team. Granted– don’t make deals with jerks! You could be with this team for the long haul and you should be sure they’re considerate and trustworthy before you sign anything.

Customers already paying for a company’s product or service is a great indicator of future success. Of course, this is most applicable if the company is charging a premium. A critical note: companies shouldn’t be aiming to create the market’s cheapest product unless it is a scale company.

If you could see yourself or your company using the product, it may be filling a crucial gap in the market. For example, if you see a product and your first thought is “Wow, this would make my own workflow 10x smoother,” it just might be a superb product.

Think about the actual basis on which a market depends and situate it within larger trends– what assumptions about society and people is it built upon? Will these assumptions be as strong in the future? Also think about market saturation… are there already too many companies in this niche? (That said, saturation may not be a dealbreaker if new technology is creating gaps in the market.)

Investors often talk about ‘moats’ in considering how unbeatable a company could become. Consider if the ‘moats’ for a company you’re looking at are real or fake! Truly gated moats are extremely rare and don’t exist in most industries.

Some factors to consider when examining defensibility are the long term margin percentage, the compounding scale, the revenue renewal/reoccurrence, and the customer mix.

Does the team have a physical product at their seed fundraise (even just a prototype)? Are they notably fast learners? Do they sell themselves and their product with ease? What are their actual motivations in building this company… whose story is driving them? This last question can reveal a lot about a company’s potential.

Don’t become overly fixated on valuations. Remember that, try as you might, you can’t predict how well the team will execute, how gracefully they’ll pivot, or how big they’ll grow.

Also, don’t be too distracted by a ‘bad’ team. Obviously, a great team is a much better indicator, but a less impressive team can sometimes just be a neutral signal.

Helping an early startup is easier than helping a later one.

For a new company, you can help with hiring, firing, culture, fundraisers, deals, customers, distribution, M&A exits, and supporting the mental wellbeing of the founder. You read that last one right– founders often need emotional support! Their job is extremely demanding and tiring.

Later stage startups often need much more specialized help. For instance, executive hiring and management, board management, late-stage round assistance, secondary/tenders, IPO, product co, internalization, M&A buying others, and again supporting the mental wellbeing of the founder.

Putting your personal interests over a company’s is poor form and, unfortunately, all too common. Never give bad advice, don’t try to offer any advice in areas beyond your expertise, and don’t block good exits!

A promising founder is determined to solve a real problem. If they or someone they love has come up against this problem directly, they’ll have an intimate knowledge of it and potentially know of a critical need that their startup meets.