by Emmanuel de Watteville, co-founder of Blue Ocean Ventures
When anyone considers their own option to invest in a growing project or venture, they immediately think of the financial risks that come with such a business endeavor. Investing has always (and will always) come with a long laundry list of liabilities that can deter even the most experienced investors from making a generous contribution to a startup or early-stage company they believe in. However, what if I told you that making a sound investment into a blossoming startup could lead to a profitable return with minimal risks involved?
There’s a trick or two that most seasoned investors keep tucked away for when they want or need to feel secure in a project they plan on investing in, which hopefully has some chance of achieving success down the line. It’s simple; know how to spot potential and use your area of expertise to identify whether or not this startup’s product or service will become a lucrative asset to its audience.
Here’s how to spot potential in a growing company when looking to invest:
Assess the company’s product or service.
Start at the beginning and notice what the public will recognize about this company at first glance, which is their product or service. One of the most effective ways to spot solid potential in an early-stage startup is by checking out the working technology, as well as the current operating model, making sure it’s seamless and user-friendly. The technology that powers up any developing start-up or company is the foundation of its projected success. It’s not enough to simply rely on the number of downloads or initial sign-ups they receive to make a prediction of profit. An investor should know that the key to feeling secure with a product or service in development is to see that an app or other piece of technology can vouch for growing numbers based on consistent consumer use and not just a one-time engagement.
Secure the financial investment plan.
The financial set up pertaining to any sealed investment is a crucial piece of the startup assessment puzzle. A financial investment plan should provide answers to a sequence of questions that allow the investor to identify a laundry list of initial concerns. First, what rights are the investors being granted after making their financial contribution? From there, it’s time to inquire what the value of the company currently is and if their investment is going towards equity or loans. Finally, to whom would we be selling this company to in five years, and at what price? Typically, when a financial investment plan appears to be legally sound and beneficially appealing, the deal accounts for a total of 50% of the predicted return on investment.
Once a financial investment plan has been pitched, presented and approved, how can an investor make sure the ROI predictions are as close to accurate as possible? Besides evaluating the company’s missions and objectives, analyze the “blueprint for success” and monitor each benchmark performance daily and associated progress. As the company scales, hopefully at an accelerated pace, investors can place their faith in developments that provide results and in return, they will feel more secure with the contributions and long term ROI projections.
Evaluate the marketing and monetization strategies set in place.
Once an investor has completed a once-over of the technology, it’s time to reconcile two non-negotiable requirements that can either prove or disprove a startup’s ROI potential. These two requirements are possessing smart marketing and monetization strategies. A solid marketing strategy shows more than just a long term commitment to effective advertising and self-promotion; it shows investors that the company is determined to gain traction amongst its target demographic or the community it’s meeting the demands of, while on a mission to retain consumers, leading to maximum ROI in the long run.
A concrete monetization strategy, or at the very least a revenue model, gives investors detailed insight into how a startup plans to generate profit once an established network is set into place. If a company has no revenue model to reference or use as a guide, it will not survive the imminent four year mark that makes or breaks their business. It’s essential to dissect marketing and monetization strategies together. Look to the company’s leadership to clarify where they’re headed and where they plan to be in a decade; at the very least, “the founder should be able to tell you the percentage of the market that they plan to capture over a specific time period and what type of growth potential they envision.”
Measure the traction to be gained from the product or service.
There are a number of questions that every investor must answer by way of the startup, before deciding to make a hefty investment. In this case, questions such as “What does this company’s product or service have to offer?” or “Does it possess any unique selling points or defined characteristics that sets it apart from its competitors?” will help minimize any risk associated with the sum being contributed to the startup in assessment. It’s also important to ask, “Is it a “first of its kind” asset that’s creating a new space or market?” Believe it or not, the answers to these questions will measure the need for this company’s service or product, rendering it useful or “game-changing.”
Remember, if there is a consumer-based demographic or community that will benefit from this early stage startup, there’s a greater chance you will turn a profit on your investment.
Size up the company’s founding team members.
Save the most time-consuming assessment for last, because as an investor, you’ll want to dedicate the majority of your expertise and energy to it. Identify the strengths and weaknesses of the company’s founding team members, and those they hire at the ground zero stage of development. This step in determining your greatest chance at maximum ROI will catapult the investment process into a series of fiscal-centered meetings, and requires experience to do so effectively.
The team that any investor should be placing their trust in is one that can deliver on a promise. So, how do you know your putting your money and trust into a team that can do just that? Discuss the team’s business plan with them, understand their mission objective, take notice to how well they perform under pressure, and most importantly, ask yourself, “are they able to expand their product or service’s reach past a smaller demographic and to a larger player within their relative space?”
Before sealing the deal, the final step is to learn whether or not the company’s founder is willing to pivot in the future. Investing in a founder is key, because “if there’s a strong leadership at the helm of a good idea, they have the best chance to execute on their mission.” Nothing ever goes as planned (entrepreneurship 101!), which means that business and development models will have to change along with the fluctuating market any company is aiming to align with. Place your bets on an entrepreneur who has the guts to pivot, restructure, bounce back, and the stamina to re-orientate his business when profitability starts to seem bleak.
It’s important to note that any return on investment will take an estimated 3-5 years, with a 20-30% profit margin, approximately. However, making an investment and waiting out the startup’s development and success will prove to be worthwhile, assuming an investor assessed said startup thoroughly.
Emmanuel de Watteville, General Partner and Co-founder of Blue Ocean Ventures, has been part of the startup ecosystem since 2003. He has acquired extensive experience in coaching, creating, managing, developing and financing more than 200 high-tech startups across several sectors, including the medical and information technologies. With over a decade of hands-on experience in venture capital, Emmanuel is also an expert in M&A and deal structuring.