How To Evaluate A Startup - An Angel's View

Sushanto Mitra, Founder & CEO,  Lead AngelsHaving worked with various local and global firm and possessing a diverse experience in the domain, Sushanto strives to bring together indispensable entrepreneurial experience for venture capital investments

The success of startups has turned the global economy upside down. Today, the top five companies by market capitalization are all startups. Apple, Alphabet the holding company of Google, Microsoft, Amazon, and Facebook has replaced the old economy players like steel and staples companies that once occupied these places. No wonder everyone is making a beeline for investing in startups.

At the same time, most startups fail. It is estimated that 98 percent of startups do not survive beyond their fifth birthdays. Some of these startups fail after millions of dollars have been invested into them apart from the blood, sweat, and tears of the founders and their teams. So, while investing in startups can be spectacularly profitable it is also amazingly(pun in tended) risky.

Consequently, evaluating startups for investment is the proverbial million dollar question. There are unfortunately no easy answers here. Startup evaluation is much harder than evaluating old economy companies since most of them are usually not profitable, lack a sales history and a few may not even have a pre existing demand for their product or services.

There are three key parameters that an investor looks at when evaluating startups Market, Capital and the Team.

If there is one thing that is common
among the top five companies in the world, they occupy dominance in the markets they operate in. So the first thing that investors need to evaluate is whether the startup operates in a market that is very big and growing and secondly does it have something disruptive that can potentially allow it rule that market and keep ahead of the competition. The second thing that is worth examining is whether this can be achieved with limited capital and time.

Passion. Market Knowledge and Technology-
The Key Players

Equally striking among dominating startups is the quality of their founding teams. Their extreme passions, their knowledge of the markets and technologies as well as their persistence are strikingly different from founders of other startups. Usually, their past often has some indications of this potential.

An angel network is a perfect way of not only finding interesting startups but also networking with like-minded people and learning about the exciting world of technology and innovation

In the Indian context, where early stage capital is limited, the ability to raise subsequent rounds of capital or to find strategic acquirers is also critical from an investor's standpoint. Running out of cash is lethal. Almost 40 percent of startups fail due to lack of capital globally. The percentage is probably much higher in India. From an investment standpoint, it is also vital to look at whether the company is capital efficient. This means wheth er the business and the founders can build a frugal company that requires only small doses of capital to generate large amounts of sales, in other words,the incremental capital to sales ratio is another aspect that needs examination.

While, evaluating a startup is in itself a herculean task, the job of accessing such startups and then negotiating with them as well as completing the paperwork is almost impossible for most individual investors especially in India. Equally essential is the task of monitoring the company post investment and supporting it in its baby steps before it grows up.

Thankfully, there are now multiple angel networks that leverage the wisdom evaluate startups and have full time teams to identify startups and organize the rest of the steps. Some of them also have an advisory arm to assist startups in the critical task of finding subsequent rounds of funding or getting acquired which is a desired outcome of the investment. There are also angels network that have associated firms that help these startups in keeping their books and statutory compliances in place which once again a boring but critical task in India. For most individual investors, an angel network is a perfect way of not only finding interesting startups but also networking with like minded people and learning about the exciting world of technology and innovation.