What are experienced entrepreneurs and investors looking for in early-stage start-ups?
I’m often asked what investors and advisers are looking for when evaluating early-stage start-ups. Which criteria do they use and what, in their mind, separates a great start-up from one that’s not so great.
In this post, I’d like to explain my thinking process when meeting a founder or start-up, using the case of CluedIn, in which I’m a shareholder and adviser.
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Brief introduction to CluedIn
CluedIn has developed a novel data integration platform. This enables companies to utilise data across persons, departments and systems. Most companies struggle with data because it’s unstructured and scattered across many different systems. This leads to data silos where otherwise useful data and knowledge are lost due to lack of data integration. CluedIn solves this problem using built-in integrations to more than 150 different applications.
How do I evaluate start-ups?
When evaluating start-ups, I look at three elements:
1. Will this happen?
2. Is the opportunity big enough to be interesting?
3. Is this the team to bet on?
I’ll now explain my thinking process about each element using the example of CluedIn.
1. Will this happen?
Do I believe that this ‘thing’ will happen in the future? This ‘thing’ could be disruption or change of industry X, the introduction of a complete new type of products, etc.
I often enter a new start-up very early in the process. There may be an MVP and some users, but very little revenue, if any. There’s a lack of hardcore data on which to evaluate the opportunity. And often, there’s no market as it’s a completely new category of products that will hopefully become big in the future. I’m therefore basically down to my gut feeling: do I believe there’s a real need for the product that the company is developing?
In the CluedIn case, this was relatively easy as I’d felt the pain myself. Having worked both in medium-sized international organisations and with multiple start-ups, I know that generally all companies have the same problem: generate an awful lot of data that could help in both front-end and back-end processes. But this data is very rarely used as it’s structured across over 50 different systems and multiple departments.
Even more importantly, most companies already perceive this as a real problem. I very rarely meet a company that doesn’t agree that the data they generate and hold is essential for their future success. But none of them know how to utilise the data. This is why I bought into CluedIn’s mission very quickly.
2. Is the opportunity big enough to be interesting?
Start-ups are risky. Statistics show that over 80 per cent of early-stage start-ups fail. So the few successes have to pay for all the misses. In my (and many other experienced investors), the risk of ‘small opportunities’ is often as high as in start-ups with a much bigger market opportunity. So if the risk of failure is basically the same, then we’re all looking for something that has the potential to become really BIG.
In the case of CluedIn, this was again a relative no-brainer for me. The problem the company is solving is not only a local but a global problem that pretty much all companies in most industries are facing. And when all these companies are pumping billions of dollars into ‘big data’, there is a major opportunity if you can solve this.
3. Is this the team to bet on?
Ask any experienced founder or investor and they’ll tell you that the team is everything in a start-up. Especially when dealing with really early-stage start-ups, where there’s limited customer traction, you really have to trust the team. Most of us are passing up a lot of business opportunities, not because point 1 or point 2 isn’t true, but because we don’t believe that the team presenting the case is strong enough.
In the case of CluedIn, I was introduced to the team by a mutual contact (a partner in a VC fund). He thought it was an interesting project but way too early for VC, so he referred the team to me. Such introductions are extremely important because, of course, I spend more time on investigating opportunities that come with a recommendation from a trusted contact.
So what do I (and others) look for in an early-stage start-up team? In short, we’re looking for someone who can SELL and someone who can BUILD. By ‘selling’ I don’t only mean selling to customers, but in general an extrovert person who loves to communicate with customers, partners, employees, the media, investors, etc. In other words, someone who can sell the vision of the company to the external world. Without such a person on the team, it will have a hard time. It’s not always the best product that wins, but the team that can convince the world that they have the best product. These are two very different things. Of course, they also need to have the person(s) who can make the product. You can’t outsource this because you need people on the team (not consultants!) building your product. You need someone to build your product who shares your vision and passion, not a random outsourcing company that just wants to send you a bill.
Thank God, then, that CluedIn already had an amazing team and two co-founders with a great mix of SELLING (Tim) and MAKING (Martin). They were among the first engineers at the very successful CMS company Sitecore, which was a further sign of their capabilities. I was very sure that this was the team to bet on.
Fast-forward to the present day
Thank God I was right. CluedIn was the right team to bet on and the company has launched its first enterprise product with great customer traction.