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- According to general statistics, only 3% of startups manage to generate substantial exits, thus investing in them is a great risk. Considering this, is it possible to define certain parameters in order to differentiate those that will succeed from those that will not?
According to a report published by The Telegraph, the venture capital industry has tripled in the last 10 years, increasing its value from USD53 billion to USD160 billion.
While there is now more availability of financial resources for the growth of startups around the world, the big question for those who are in the middle is: “Am I really making a good investment?” This raises an even more interesting question: is it possible to predict, through objective parameters, the success of an early-stage startup?
During the last week of May, ChileGlobal Ventures received Craig Mullett, President of Branison Group, an M&A company based in New York, who has more than 20 years in the world of venture capital, having invested as an angel investor in 23 startups, generating four exits, five write-offs, while the remainder continue to be active.
Thanks to his vast experience, Mullett has managed to find a formula that can guide investors when deciding whether to put money into a dynamic company. “The most valuable thing I have discovered when investing in startups has been a framework to evaluate early-stage startups, which I use to determine whether or not I will invest in them” says Mullett.
These are the 5T’s, five unique essential parameters that must be defined by the startup when presenting its solution:
- Target Market: “For this item I try to identify whether the startup knows its market and if so, if it is large enough to develop a valuable business. To do this, I expect the startup to be able to show me its total target market, which should be of millions of dollars at least. I would also like to see the current market in which the startup operates, being able to lead a niche market evaluated at approximately USD100 million. With these two parameters I can get an idea of whether the startup will be able to jump from the niche market into a significant share of the total market.”
- Technology or Product: “Is it unique and defensible? Is it designed to escalate? These are the questions I usually ask myself about the product presented by the entrepreneurs. If you then add in some intellectual property and or patents, the investment probabilities will increase.”
- Team: “Over time I have realised that perhaps this is one of the most important points when evaluating a great founding team with a combination of innovative thinking, sales skills and execution approach.”
- Traction: “This is possibly another key point to determine if a startup has a future or not, which is about having proof that customers want and will pay for the product. This can be with clients, users or with some type of patent that proves that the technology works.”
- Terms: “This item determines the reasonable valuation that compensates investors for the high risks involved in investing in startups.”
While these may seem too many elements to evaluate, Craig recommends looking at a specific one when making defining decisions: the team. “Even if you have a very good target market, an exceptional product, you can even have traction, but if you don’t have a good team that knows what it’s doing, investing in it can be a big problem. Most likely, entrepreneurs will face, along with their team, many challenges on the way to the exit: competition becomes stronger and the market changes, so the team must be prepared to thrive and succeed. If I get the feeling that the team cannot carry out these challenges, I must go ahead and find another team that can do that,” says Craig.
