Before The Dive: A Simple Framework for Assessing Startups
By Abdulrahman Mansour
Given the vast number of startups investors get exposed to, it is important to have a clear framework for deciding which ones to proceed with.
When examining an investment opportunity, there are many factors to consider. The decision on whether to proceed with the deep dive assessment entails three main pillars: the team, the business model, and the market.
The team is the critical pillar separating success from failure for any business, and for good reason. The quality of the founders and their ability to execute is key to help navigate through the challenges and obstacles startups experience along their journey to success. You can have a great idea, but if the team can’t execute, an idea remains just that. The team must show strong technical and business skills as well as a willingness to learn and grow. However, a great team does not guarantee success, it only increases the chances of it.
So that brings us to the business model which is an equally important but somewhat complicated pillar to consider. The startup must provide a solution for a significant pain point in the market. This solution must have a defensible edge relative to competition. The startup’s scalability must be carefully assessed as this has a direct impact on valuation. Another vital consideration is the ability of the startup to monetize. Are they generating revenues from day one, or are they building a user base they will eventually monetize from sometime in the future? Additionally, the business unit economics must reflect a sustainable path to profitability.
The third pillar is the market. Points to consider include: Is the market large enough? Can the current market absorb the startup’s scalability potential or will they be forced to expand to new markets? What is the competitive landscape? Can the business successfully compete in this market, given its team, its technology, and its competitive edge? How much market share can they capture? Is the timing right? What are the different exit opportunities? Assessing the current value of the company, and comparing it to its potential value is a vital consideration. Can I, as an investor, generate the required multiples on my investment? These are all important points investors must consider before agreeing to any term sheet or proceeding with their due diligence.