Spotting the start-ups with the highest potential of success

Investing in start-ups can be a tricky game. Some live by the philosophy that investing in start-ups is a hit or miss type of deal. While that statement has some truth to it, smart investors know that there are certainly ways to spot the start-ups with the highest potential of success. Just by asking yourself these few questions, you can quickly learn how to discern the best start-ups to invest in and give yourself the highest chance of making a good return.

Does the Start-up Have Categorical Potential?

Clearly as a start-up, current valuation is basically irrelevant. This is why honing in on the categorical potential of the business is key when investing in a start-up. You should look for companies leveraging technology to build and dominate new market categories. You should be asking yourself questions like “Can this become a giant new space?” “Can this founding team summon the balls, brains, and bucks to become the company that dominates this giant new category?”

Was It a Solid Pitch?

I am approached by hundreds of entrepreneurs every year, pitching me their respective businesses. Some are very polished and focused, others amazingly ineffective and convoluted. Nothing is more of a red flag than a horrible pitch when deciding to invest into a start-up. I have found that the best pitches clearly layout the framework, realistically set goals and ultimately let the idea sell itself. The person pitching needs to be confident and knowledgeable. If the pitch lacks these core principles, you shouldn’t invest.

Do You Have the Right Industry Knowledge? 

I previously mentioned the importance of investing in knowledgable start-up owners and that is indeed critical to the success of a start-up business. They have to know their start-up costs, how much has already been invested into the business and why they need the funding. But, you too need to have a good sense of industry knowledge if you want your investments to succeed. You should have a pretty good idea of what is required for the business to succeed. Smart investors add value to their investments through their network and knowledge in addition to the money they are providing. 

Can You Make Money?

Obviously this is the most critical aspect to consider when investing in a start-up. Investors are not in it for charity. The reality of it is, as an investor you are in the business of making money. Therefore all things considered, it ultimately comes down to this point. Also as an investor, you want more than the return of your initial investment. How a business is poised to make money over the long term is a crucial aspect. So before you invest into a start-up it’s important to analyze if the owners are realistic about the degree of competition they can survive and have they presented an idea that cannot be easily copied showing they have clearly thought through how their business idea will function in the real world and how they will stave off competitors.