Over the last three years I’ve evaluated more than 1,500 startups*. In most of these cases I was asked to score and rank them against a given set of criteria. In some cases I was evaluating them with the objective of making an investment. Over time, I got really good at assessing the merits on five distinct dimensions.
If you are an aspiring startup, it’s useful to know how investors and judges are going to evaluate your opportunity. If you are a newbie investor, it’s useful to know how experienced investors evaluate startups, so you can create your own system of evaluation. There is no end-all-be-all system. Every startup is different, but every startup must be capable of maturing into a viable, profit-making business. Every system of evaluation should determine which startups have a shot at becoming one of those businesses.
Most investors – and investor platforms – have a system for evaluating and ranking startup opportunities. They typically look at hundreds of data points across five dimensions: Product, Market, Team, Strategy and Economics. These are the standards, or fundamentals, on which the evaluation is based. Each dimension can be further defined and expressed by a set of criteria.
How all the underlining criteria is weighed differs widely among investors, based on their industry sectors, investment objectives, experience and personal preferences. For example, many investors give more weight to the quality of the team than to the quality of the product. They figure a good team can “fix” any deficiencies in the other dimensions. If you have a five-star team and a two-star product in their eyes, your chances of attracting financing are still pretty good.
When the scorecards are completed and tallied, few startups are going to rank five stars. Those that rank five stars have no problem attracting financing. Most of them don’t even need financing, they only take the money for buzz, cushion, and to keep the inevitable copycats at bay. Everyone is chasing those deals. If you are one of them, count your lucky (five) stars.
So what does it mean to be a Five Star Startup?
It means you have created a company (not just a product) that excels on all five dimensions – and they are perfectly aligned. When the stars align, it is pure magic, and you have bottled it. Not only are the stars perfectly aligned, the timing for each is impeccable. Your deal is irresistible to everyone who sees it.
When investors dig in and dissect your company during due diligence, looking for fatal flaws and buried bodies, they are surprised to find none. They dig deeper…and get happier. They expect to peal an onion, but find a juicy, ripe fruit. And it’s low hanging fruit.
On a scale of 1 to 10, all of the underlining criteria in each of the five dimensions ranks between 7 and 10. It’s not that your company is perfect. It has its share of challenges and issues. It’s that all of the challenges and issues are manageable. There are no insurmountable issues. All are readily resolved with talent, know how, money or connections.
By contrast, many startups are saddled with some seriously negative things that cannot be fixed, no matter how much money or talent you throw at it. The biggest thing being bad timing, usually being too early. None of those things are present in a Five Star Startup.
Now that you know the five dimensions of evaluation, you might want to know the underlining criteria most investors use to determine how well you rank in each dimension. You should know all the “things” that are likely to make an investor pass. I will try to cover these things in a fair amount of detail in my next series of posts.
The first dimension is PRODUCT. Read the article here.
* Most of these evaluations were cursory, high-level reviews, intended to offer constructive feedback. This includes the decks people sent me and the invitations to review profiles on Gust, Angel List, Venture360, Proseeder, and other startup-investor platforms. It also includes accelerators, business plan competitions and pitch contests where I served as a judge or mentor.