Investment Strategy: Key Elements to Look for in a Startup

You’ve got money to burn and there’s a wide selection of startups vying for your attention.

All have delivered compelling pitches as to exactly why you should invest in their particular product, service or clever concept.  The problem is you don’t really know which one to choose in terms of getting the best ROI.

Investing Requires A Strategy

Like playing online poker, you have to make the best decisions based on the cards you’re dealt. Players analyse the probability of achieving winning hands based on all sorts of criteria, such as the number of decks of cards in-play and the rules pertaining to that particular variant.

In the investment world, the core elements of a startup or business are the proverbial playing cards.  It’s your job to stick to a well-defined strategy when weighing up investment opportunities – and that means conducting thorough due diligence by evaluating each element and it’s potential to grow the business.

What are the elements that form the architecture of a new company, enterprise or business?  Here’s what savvy investors look for in a startup long before discussions of a possible buy-in or acquisition take place.

The ‘Human Capital’

The success of any startup is determined by the knowledge, skill and competencies of the people who are involved in the business.  Ideally you want to work with a team of closely-knit individuals who not only have the complementary skills to run the business optimally but have tried and tested expertise in the market.

In real terms, a team that has excellent managerial skills, proven work experience and the capabilities to work synergistically is a team that has the best qualities for long-term business success.

At the end of the day experience is arguably the most vitally important component of any startup team.  That’s not a thumb suck on our part.  In a 2008 study published in the Journal of Financial Economics, experienced entrepreneurs were found to have a vastly higher predicted success rate than first timers.

What’s the first rule to a good return on equity?  A coterie of excellent personnel who have individual skills that perfectly dovetail to create a lean, mean operations team.

The Market

The size and scale of the market is all-important when it comes to financially backing the right business.  Ask any investor and they’ll tell you ‘market really matters’ as it signifies the potential for growth.

If the market is small, constrained or already heaving with similar products or services, it’s time to take a hike. Conversely, if there’s real potential for growth it’s a good time to pull out that pocketbook.

Before you scribble your name on the check, make sure the startup has the resources required to drive growth and benefit from the economics of scale sometime in the future!

Along with exploring the size and potential of the market and what kind of competitive edge the startup brings to market, it’s a good time to determine the market’s appetite for acquisitions.

If there’s a hunger for businesses in that particular area of technology, industry or commerce, you can tick off the box called ‘exit strategy’ which we explore a little further down the page.

Rule number two is invest in a startup that has access to a potentially huge market.  It’s the quickest way for the business to emerge and start raking in the profits.  It also makes it easier to sell your equity in the venture when it’s time to hit the ‘exit’ button!

Market Traction

A startup that has potential access to a large global market is a nice prospect but a business that already has traction is the market is a ‘done deal’.
Any serious investor would obviously prefer quantitative evidence of the startup’s impact on the market rather than guesswork or predictions.

A business that has momentum in the market and displays a slow but steady growth is a tantalizing prospect indeed for funders seeking a quick ROI.

The third rule in the investment game is choose a startup that has already made a positive impression in the market.  It’s a fact-based strategy that seldom fails.

The Exit Strategy

A liquidity event like listing the startup on the stock market or the acquisition of the business by another company is what is known as an exit strategy. It’s the way investors get their money out of a startup… hopefully with a heap of profit added to the share or purchase price.

A well-defined business plan not only focusses on future goals and how the business is going to achieve those goals, it outlines the long-term strategy the business intends to employ as regards the exit of investor funding.

According to business pundits, the best exit strategy for investors is the sale of the whole startup, business or project.  A takeover generally has a good return on investment and usually occurs within a relatively short period of time.

Alternatively, a merger or IPO guarantees the business stays afloat, remains in the same hands and allows investors to get their money out, if they so desire.

The fourth and final rule is only invest in a startup that has a well-defined exit strategy in mind!