3 Signs a Startup Has What It Takes

When evaluating a startup’s viability, there are standard boxes to check: indication of a strong market opportunity, a team with a strong work ethic, interested customers, a market differentiator. But what about that “X factor” you can’t quite put your finger on — the indescribable “thing” that subtly conveys a company will succeed?

Sometimes, the X factor is obvious — a sense of confidence or an air of success. But other times, you have to look for it. 

The Boxes You Absolutely Have to Check

Of course, investors want to make sure that any startup they fund checks the obvious boxes. Its financials need to be in place and solid. It must have strong profitability projections. Its team members need to have the know-how and leadership capabilities to execute on what they say they’ll do. Commercial traction is another biggie: You need confidence not only in the market opportunity, but also in customers’ likelihood of buying the product. 

But when determining which startups to fund, there are other factors to consider — all of which contribute to that enviable standout factor.

1. Startups need to stand out in their industry.

With potentially millions of dollars on the line, it’s important that investors take the time to do their due diligence and educate themselves on the industry. That way, they can instantly spot a diamond in the rough. Dan Connor, partner at Ascend Venture Capital, reviews 300 companies every month and takes a thorough approach. “Ninety-five percent [of companies] are eliminated immediately, because they are too similar to the things I’ve seen before,” Connor notes. “The remaining 5% take a long time to review, because I’m thinking long and hard about whether or not they are a unique play or if they can win in this industry.”

The upside for founders? Investors who’ve done their research are more capable of helping you distinguish your brand — or avoid obstacles that have tripped others up.

Investors need to make sure they have enough context to determine how a startup’s solution fits into the industry at large. They need to be able to confidently determine whether the valuation is in line with the industry and region. More importantly, investors should get to the crux of a company’s mission — its “why” — so they can understand what the draw will be for customers. A thorough understanding of the strategic vision will also strengthen their relationship with the founder(s). That’s crucial if the need for a pivot should arise. 

2. Leaders should reach out regularly (beyond requests for a check).

Members of a startup should meet with investors long before broaching the subject of money. Ideally, company leaders should interact with investors months ahead of the actual start of their fundraising to build a personal relationship. Startups might also stay in touch by sending out monthly company newsletters or investor- and potential investor-specific updates.

For investors considering investing a big chunk of change in a business, their relationship with the leadership team is arguably just as important as the numbers of the deal. In the end, these interactions and relationships can make or break the partnership; it’s vital for investors to know early that the founders are interested in doing their part to cultivate a strong bond. If founders’ eyes are only on investors’ pocketbooks, the partnership is doomed from the start.

3. Leaders actually have skin in the game, which beats passion any day. 

Oftentimes, investors are sold on how “passionate” founders are about their company. Passion is an admirable quality, but passion alone only gets a startup so far. Investors should look for entrepreneurs willing to invest at least some of their own money. When the going gets tough, no amount of passion will keep a founder working 13-hour days. Skin in the game goes much further in trying times.

Twenty years ago, a man approached lending professional David Bradshaw about opening a kiwi farm in Georgia. He claimed to have it all figured out. When it was winter in New Zealand, it was summer in Georgia, so he’d corner the kiwi market. He’d already identified land and equipment to purchase, as well as wholesalers to (potentially) buy his fruit. He projected he could sell kiwis for 50 cents each — but he needed 100% financing of the startup cost. Bradshaw opted not to invest, telling the aspiring kiwifruit magnate, “What you have is an idea, not a business.” 

When evaluating a startup for potential funding, the numbers are certainly important. But what really will make or break a startup is its ability to stand out in its market — and whether its founding team is committed to building a relationship with investors. By keeping an eye out for those subtleties, investors will have a better sense of whether a startup is worth their investment.

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