How do you get to tell the GOLD from the DIRT especially when running your investment?
Let’s face it, there are so many investment opportunities that look good at first sight but actually they are potholes that need to be avoided. To help you make the right decision when it comes to investing, We will be sharing some tips we garnered in our ten years working with startups. So here are the five questions you need to ask before making your move.
1) Would you start start a company with them?
Asking yourself this question before delving into any investment forces you to evaluate the fiber of the founders of the startups. Some other questions we do ask when we find ourselves in the midst of startup founders include “How smart are their strategy?”, “Will we attain our financial goals with them?” At such moments, I no longer see myself as an investor but more of an employee. I try digging deeper to fully understand the morale, ability and commitment of these future business leaders.
One mistake experienced investors make over and over again is seeking to be a cofounder of the company or being in a leadership position. We must understand that as investors, our actual business is giving necessary support to a startup not trying to lead it.
2) What they do, do I love it?
Investment isn’t just putting your money where you will have the highest ROI. Do I really have an interest in what these guys are trying to do, or are we taking on this deal because it is so competitive? Your care for a startup gives you the drive even when it seems the new business is sinking. When your love is strong enough, you find yourself trying to source best talents for the business, and even promoting the products of the startup whenever you get a chance. With your network, you do all you can to build up the startup.
3) What value can I be to this new business?
Gone are the days when you just put in money and then go to bed expecting millions of dollars in return for your investment. Now, you need to bring in relevant knowledge, contacts and talents to make the startup a success. Startup founders have smartened up these days. They only let value adding investors into their businesses to prevent their startup from losing direction. Your contribution at the early days of a new company determines what you will get out of it. This means you must bring to the table everything that is needed to scale up the business without being at the fore front of leading the company.
4) To what extent can the startup make an impact
In my years of investing in companies, We solidly agree that most newly founded companies will pass the first three litmus tests. The fourth puts them in a box. We have seen people with million dollar ideas and strategy that can make huge impact globally; only to discover they never actually left beyond the state the business was started.
As true as this may be, it is also relative, in the first place how do you define “major impact”? Though definitions will vary greatly, they all seem to tend to a central point.
Here are they:
Size of the market
When you think of Uber and Airbnb, you will most definitely agree that these new companies truly disrupted massive markets. In some situations, newly founded businesses create a whole new market altogether. Same goes for the startup you plan investing in. Their market reach is a serious issue to be considered.
Size of improvement
To what level can the business solutions offered by this new startup, make a difference in the lives of consumers? Most times, business pitches We receive make just very little improvements to the already existing solutions in the market. However, We have discovered great companies don’t just slightly improve upon what is already existent, they make major impact. When business founders are less concerned about the impact they are capable of making, We immediately sense that their sole drive is making money and without hesitation, We back off. We believe making a difference is more important than making money.
5)Is the time right for the launch of this business
Though the last to be considered here, but it is very important to set the time right for a business. Timing is very important for a business to succeed. This is because technologies are always changing, consumer preferences are always shifting. You need to evaluate how fast these changes are happening else, you would have been overtaken in the race even before the launch of the startup you’re investing in. If the changes are being too rapid, it is better to wait and know what direction the market is headed. Understanding the times requires deep knowledge of history and a curious mind that desires to know the world. You will agree that factors that can alter a business are pretty much. Scaling up a business successfully implies having a plan that spans 5 to 10 years for the company. Proper alignment with the founders of the company is also important. For us, We try to know how they plan to offset major changes in the market that can affect their company.
Arriving at a decision
Now you have all questions that need to be answered before investing in a business, how many yes do you need? For us as at Goldfish, We must get a yes to all five questions, or else we move on to the next deal.