Private Investor Checklist

For Evaluating Early-Stage Technology Companies and other Investment Opportunities

By Mark Stephens and Bret Jackson

I am sure you are all familiar with the phrase, the greater the risk, the greater the potential reward, but with the potential for substantial loss.

There is one word I would like to focus on in this phrase. And that is Reward.

Investing in early-stage or start-up companies, is certainly considered high-risk but there are definitely steps that any private investor can take to minimise their chances of not seeing a return.

During the last 10 years, I have been involved in plenty of fundraising to over ￡6m for early-stage companies. Some of which was done as part of our own growth requirements, but also for multiple companies that more recently I have been consulting with.

More recently I have been getting approached by more early-stage investors themselves, asking me for my opinion on various investment opportunities that they have been presented with.

I always explain that my own breakthrough in the investment world was aligned to an introduction to the Sequoia model, which has established itself as the defacto framework, around which most Venture Capital firms and larger syndicates operate, in order to evaluate an investment opportunity and to help establish the company valuation.

And it is this model that always forms the basis of any evaluation and assessment that I do.

Recently I hooked up with Bret Jackson, Head of Investor Relations, and an experience Broker to early-stage companies looking to raise capital.

We discussed this topic, and agreed to collaborate on an article outlining the components that any investor should use to assess an investment opportunity as part of their due diligence process.

The reward for most investments is the return on your capital. Whether this is equities, bonds, trading, through to the more eccentric asset classes of art and fine wine, it is the same outcome. However, investing in early-stage technology companies could not only potentially offer exceptionally high returns, with early investors into Unicorn businesses subsequently delivering 50-100 X ROI, and this is not rare, but it is the additional reward. Knowing your initial investment has helped produce a thriving business, generate employment, assisting other businesses with new technology.

Most successful early-stage tech investments deliver much more modest returns of around 3-10 X ROI within 3-10 years and that is considered a good result, by most investors. That said, a high proportion of start-ups and early-stage tech companies do fail, and they usually fail for one of the same few reasons or a combination of them.

In an ever-changing landscape, with many external influences when new technology enters the market it can be overhyped by many companies looking to ride on a populist bandwagon. It is vitally?important that you take a comprehensive and considered view of any potential investment opportunity and do your research.

Using Sequoia as the basis of our recommendations, here is an up-to-date checklist that any individual investor could adopt to help them evaluate any early-stage company’s investment potential.

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1.????? The Executive Team

By far the most important criteria in early-stage companies, is the credibility and experience of the senior team. Greater emphasis and weighting should be applied here, but why?

Well, an experienced team will work together to avoid the usual bumps in the road and when they do happen, they can collectively solve business challenges and problems as they go,?with minimal fuss.

There is very little substitution for experience and business wisdom in the early days. Statistically, according to research by Deloitte, a start-up business with at least one senior full-time member, that has previously completed the full entrepreneurial journey from start-up to exit, increases the probability of a successful investment by more than 50 X. (Big tick in the box)

Evaluation criteria

• Does the executive team cover all key business functions necessary to execute the business plan (e.g., product development, sales and marketing, Customer Success, finance)?
• Are the executives credible with proven track records? Do they have specific startup experience?
• Have they successfully exited similar businesses in the same or related sectors?
• Are they adaptable, able to manage rapid growth, or pivot when necessary?
• Are they approachable, open with communication in both good and bad times? (only a suggestion)

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2.????? The Problems The Investment Opportunity Solves

If there isn’t a problem or set of problems that effect enough people that require solving, then the business will fail to find enough customers or to generate the required revenues. So, look for pain points that you yourself would pay to solve. If its not relevant to you, go and ask people in their marketplace.

Evaluation criteria

• Is there a clear, concise articulation of the challenges faced by their target audience?
• Are these challenges significant enough that businesses or consumers will pay to have them solved? (I would also want to know if this was a one-off payment or a subscription)
• Do the founders deeply understand their customers’ pain points?

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3.????? Their Solution

There are typically two types of solutions to a problem. The first is the widely held academic view, and then there is the innovative angle. Innovation that solves problems is far more exciting and potentially disruptive.

Evaluation criteria

• How does their solution innovatively address the identified problems?
• Does the solution seem credible and technically feasible?
• Has it been tested?
• Is it scalable and sustainable over time, even in the face of fierce competition?

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4.????? Value Proposition

·???????? Can the company concisely articulate their Value Proposition? If a company is unable to articulate this in less than 30 seconds, then it’s likely they lack the focus needed to solve the problem. There may be several individual components, but that is the 2nd layer of detail.

Evaluation criteria

• What are the unique benefits the solution offers to the target audience?
• How does the product or service improve the customers' lives or businesses in a measurable way?
• Is the value proposition compelling enough to attract and retain customers?
• Would you buy it?

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5.????? Differentiators

This is what makes the product or service most compelling, because if a customer wants what it can do, but can’t buy it anywhere else, then you can drive demand and command premium pricing.

Evaluation criteria

• What sets the company apart from existing competitors?
• Do they possess proprietary technology or intellectual property?
• Are their processes or solutions faster, cheaper, or better than alternatives already available in the market?
• Who is their biggest competitor and how do they differentiate?

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6.????? Secret Sauce

This is an extension of the previous aspect but is diving more into the detail behind what they are doing Most highly successful innovative tech companies have some secret sauce that all their competitors would love to know or understand.

Evaluation criteria

• What unique, innovative features enhance the user experience or improve customer outcomes?
• How does this ‘secret sauce’ offer a competitive edge that can’t be easily replicated by competitors?

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7.????? Go-to-Market Strategy

Every business needs a solid GTM strategy, but each strategy has it’s pros and cons. These need to be considered in the context of the product/service, competition, market demand, the complexity of the sell etc (A highly complex solution that requires coding skills, will not be easy for any nontechnical person to resell within a channel sales strategy for example).

Evaluation criteria

• Do they have a solid, well-thought-out plan for entering the market and scaling their business?
• What is their expected makeup in terms of internal verses external sales?
• Are they leveraging multiple distribution channels or market entry points to maximize reach? Or are they exploiting too many channels, so that they are losing focus?
• Do they have partnerships or collaborations that can accelerate growth?
• Do they have a one-to-many GTM strategy?

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8.????? The 360 Principle & Marginal Gains

Many tech companies are consolidating several tools and features into a single platform, and support multiple users at various stages, and even address multiple problems. This can be quite compelling if the compound effect of this means greater rewards and benefits.

Evaluation criteria

• Does the company focus on delivering a comprehensive solution that covers all angles of the problem?
• Are they leveraging small, incremental improvements across multiple facets (product, marketing, operations) for overall business performance?
• Would a user get everything they need from within the one solution or will they need to acquire additional tech or services?? Can it easily integrate with these services?

9. Use of AI and Advanced Technologies

AI is the buzzword of the moment in the world of investment, and naturally, you can’t really consider a tech investment without considering their use of AI.

Be cautious, because this also has the potential for a lot of smoke and mirrors if you don’t ask the right questions and know what you are looking for.

AI is here to stay, and it is likely to impact almost every facet of technology and business. Nothing has impacted business as quickly as AI since the internet itself, but as the Gartner annual technology report for 2024 shows, AI is at the top of the hype-cycle right now and is about to enter a sustained period of consumer disillusionment. That is?because it’s promising so much but in many cases it is causing pain, and?frustration and is not meeting the over-hyped expectations.

AI investors should be looking for those solutions that address these problems and that will form part of the next wave in the AI revolution, learning from the inefficiencies of the first wave of Generate AI and LLM’s.

Evaluation criteria

• How deeply do they integrate AI, business intelligence (BI), machine learning, or predictive analytics into their solutions?
• Do all these components work together, and how?
• Are they using plug-in AI (LLM’s) or building proprietary embedded solutions with self-learning or self-optimization capabilities? (The self-learning aspect is key here)
• Do they employ AI for operational efficiency or customer service enhancements, such as AI-assisted support or co-pilot functionalities?
• How do they control the information generated by the AI components, to avoid the AI hallucinating?
• What does their AI development plan look like. Who is building their AI, and how are they determining what the next phases of their AI journey should be?

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9.????? Tech Stack Differentiation

Don’t be frightened to ask about the technology, even if you are not technical. Just ask your questions from a user perspective

Evaluation criteria

• Is the technology behind their solution defensible, unique, or difficult to reverse-engineer? Ask them to explain why that is?
• Does their tech stack offer a meaningful advantage in terms of performance, cost savings, or user experience?
• How secure and scalable is their technology?
• What does their 12-month development roadmap look like? And how customer-centric is it? The best technologies are driven by customer centricity, otherwise, it’s a field of dreams scenario, where you hope that your market will change its behaviours to accommodate the way that your product operates, and that is unrealistic. Do they have any proof that the market wants to pay for this type of solution?

11. Business Plan & Model

Evaluation criteria

• Is their business model sustainable and scalable?
• Do they have the right team and resources in place to achieve the goals outlined in their business plan?
• How realistic and achievable are the milestones in their business plan?
• Is it agile and flexible to that operational costs can be reduced or maintained if under-performing, and can it ramp up quickly if performing well?
• Do they have a financial business plan that you can look at?? Financial modelling of the forecast documents is key for early-stage companies. Have they experimented with different sets of results and pricing models? These are areas where early-stage companies need to be agile, being pre-prepared to adapt to lower-than-predicted revenues is quite a fundamental early-stage exercise that most savvy start-up business owners will do.
• If the business only delivered half the revenues predicted, would this still be a good investment opportunity?

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12. Market & Competitor Analysis

What is the current market landscape, and are there any institutional studies that validate future growth opportunities in the sectors that they are targeting? They should know this and have supporting evidence. The Market is the one aspect that the company can’t influence. In the VC and PE world they place a lot of emphasis on this aspect and for good reason.

Evaluation criteria

• Have they done thorough market research and competitor analysis and can they demonstrate this on dcemand?
• Can you see evidence that can offer more value or better performance than their competitors at a lower cost or for less effort?

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13. Revenue Forecasts and Projections

Evaluation criteria

• What are the company’s revenue forecasts, and how credible are they?
• If the company only achieves 75% or 50% of its financial goals, will it still provide a healthy ROI?
• Are there diverse revenue streams, or is the business reliant on a single source of income?
• When does the company expect to reach break-even point and is this realistic?
• Will the company pay dividends when it moves into profit? If so, when is that forecasted to happen?
• What is the exit strategy and who is likely to buy them?

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14. Investment Requirements

Evaluation criteria

• Are the company's investment requirements reasonable and well-justified?
• Are they being overly ambitious, or are they setting realistic expectations for growth and funding needs?
• Is the valuation sensible? Tech Start-ups with a strong value proposition and something innovative to offer, are usually valued between ￡1 and ￡2m and once the company is generating revenue, it becomes easier to work out valuations based upon ARR and their trajectory.
• How does this opportunity compare to other investment options in terms of risk, reward, and timeline to exit?
• Are there any tax relief opportunities? SEIS provides 50% tax relief and EIS investments offer 30% tax relief. Tax relief immediately reduces your capital exposure and both schemes offer an additional 25% government-backed guarantee if the company fails within the first 5 years.

Hopefully, this checklist will help you evaluate the overall potential and risks associated with early-stage technology investments.

All investments are a risk and should be entered into with the view that you may never see that money again, or that it may take longer than promised to get your capital back out.

Seek professional advice as necessary.

Remember, most equity-based investments, do not come with any facility to get your money out until an exit, so it’s a long game, where some people can do exceptionally well, whereas others can lose everything.

By conducting thorough due diligence you can minimize the risk, and increase the probability of a successful outcome.

There are also VC funds and Syndicates out there that you can join and put your money into, where investments are spread over multiple companies, but these funds will likely take 20% of your investment capital for managing your fund and typically overall returns are quite modest, in comparison.

So, it all comes down to your appetite for risk verses return.

Good luck in finding your Unicorn business to invest into, as the potential REWARD, is greater than the just the return on your initial investment.

If you have a great investment opportunity and want to reach out, please do, and make sure to connect with Bret Jackson: linkedin.com/in/bret-jackson-mcim-36069b133

If you are an investor looking for a great early-stage tech investment with Unicorn potential, then reach out me here on LinkedIn and I can share the investment deck for the company that I am currently working with, 360pro.ai