If you completed the evaluation, check your email for your results. The evaluation considers five critical dimensions:
A perfect score in any one of the five dimensions is 50. A perfect score when all five dimensions are totaled is 250.
50 – 100 Poor to Fair
Your opportunity might be best suited for a life style business. It is not likely to be of interest to outside investors. It might, however, be perfectly suited for conventional bank/debt financing.
101 – 150 Fair – Average
Your opportunity might be construed as a “me too” product, in a competitive, well-served market. Investors are likely to view it as high risk with sub-par returns, compared to other startup opportunities.
151 – 200 Above Average – Good
Your opportunity has promise. Review the areas where you scored less than a 4, and consider ways to improve those dynamics and the story. Your opportunity is likely fundable if you can shore-up the flaws. Other factors (not scored here) that can effect investor evaluation include TIMING and ALIGNMENT. These factors are discussed in more detail below.
201 – 225 Very Good – Excellent
Your opportunity is the type investors look for. Most of the dynamics appear strong. You should be able to score some good meetings and, hopefully, one or more term sheets. Good job!
226 – 250 OUTSTANDING
Where do we send the check?
Weights are applied to criteria and to dimensions. Not all criteria (statements) are scored equally. For example, if you rated a particular statement as a 3, it may have been weighted as a 2.8, or a 3.3, depending upon the relative importance to most investors. In terms of the five dimensions, most investors give more weight to market, team and economics, so those are given more weight than Product and Strategy (see below).
A raw evaluation score is NOT the only measure used by investors. They also evaluate startup opportunities on the basis of ALIGNMENT and TIMING.
After completing their due diligence, how the five dimensions are aligned (or not) in the eyes of investors will largely determine if they will be interested in investing. The underlining criteria in each of the five dimensions are evaluated differently by different types of investors. How those investors rate and assess the criteria and their alignment with each other (in their system of evaluation), will determine if they extend a term sheet.
You probably surmised by now that Five Star Startups are a rarity – very few come along each year. Every startup has flaws. Most flaws, however, are not fatal. Savvy investors know most things are fixable – and some have made a killing by helping to shore up the weaknesses and align their portfolio companies for success.
- The product can always be improved.
- A company can pivot to a more lucrative, under-served market.
- Exceptional people can be added to the team.
- Brilliant strategies can be devised, tested and executed.
- The revenue model can be perfected and the financing terms negotiated for a win-win by investors and the team.
But just because these things are fixable does not mean the company is fundable. It depends on what dimensions are out of alignment and what it will take in time/money/talent to align them for success.
Consider these three scenarios:
If the underlining criteria in each of the five dimensions ranks high after due diligence, the startup is a great bet and will attract investors like bees to honey. The stars are fairly well aligned. The deal will be oversubscribed, the founders can pick and choose their investors. The risks to investors are manageable. These deals are rare. Important to note that even if the deal ranks high in alignment of the five dimensions, the timing could be off. In most cases, the startup is usually early. A little early is good. A lot early can be deadly.
The Fundable (more common) Deal
If the underlining criteria in product and strategy are sub-par following due diligence, the deal may still be fundable as long as the market opportunity and team rank high. A good team can fix a subpar product. Smart investors can help fix strategy. And, of course, if the economics are strong, there will be enough investors willing to take the risk. These are the most common types of deals invested in by both VC’s and angels.
The UNFUNDABLE (typically rejected) Deal
If the underlining criteria in market and economics are sub-par following due diligence, the deal has almost zero chance of getting funded. This is especially true if the team is average (usually young and inexperienced) and the economics don’t make sense. Every investor (including myself) see these types of deals EVERYDAY. The product is usually awesome, but there is no defined market for it and/or no clear idea of how the company will make money. The risks are too high for most investors to want to help fix these problems – there are better deals to chase.
Upon concluding due diligence and assessing the rating and alignment of the five dimensions, smart investors will give serious consideration to TIMING. It’s a super hard variable to evaluate, but plays a critical role in a startup’s likelihood of success. As Victor Hugo famously said, “Nothing is more powerful than an idea whose time has come.” If you get the timing right – and the five dimensions can be brought into alignment with a moderate degree of risk – you are golden.
Bill Gross fromIdeaLab gave a great TED Talk: The Single Biggest Reason Why Startups Succeed. You guessed it, his findings found that TIMING was the biggest reason. In my humble experience, having founded seven companies and been involved as an investor or advisor in dozens of others, I agree wholeheartedly with his conclusion.
In my small world as a startup founder/investor/advisor, being early and scaling prematurely has been the single biggest cause of failure. In hindsight, the task at hand was practically insurmountable, no matter how much money and talent we threw at it… no matter how passionate, how committed, or how hard the team worked. That’s a critically important (and expensive) lesson for all startup founders and investors! It begs the need for more posts on the subject of startup timing: how to recognize it, and what to do if you are too early or a tad too late.
For all of their challenges and risks, startups are still the best source of new innovations, new jobs, and new wealth. May more of your startups be FIVE STAR. Cheers!
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