Assessing a start-up’s potential in 12 minutes and 56 questions

The opportunity

Here’s the exciting bit. What’s the business and opportunity all about and what stage is it really at:

• Tell me about your business (assuming I’ve already had a look at the website or some other information as I like to be prepared before wasting my time)
• What problem are you solving?
• How big is the problem?
• What’s the value for a customer?
• What’s compelling about your offering?
• How easy would it be to replicate what you are doing?
• Who are your current competitors or similar players?
• What are the barriers to entry?
• Have you any experience in this industry sector?
• What role do you play in this business?
• How much money have you personally invested?
• Who plays the other roles – who are they and what are their backgrounds?
• What’s the current shareholding if you currently have partners?
• What value do they add? (this could kill the deal as often the equity is already split too many ways for not much added value unless a complete restructure)
• What are the macro factors going on in the industry right now?
• Is the industry growing or declining and do you know why?
• How much have you invested to date in this business in terms of hours and money?
• What metrics have you achieved so far i.e. number of users, current customers, growth rates?
• How much has it cost to acquire a new customer (does this person even know their own metrics? Most don’t!)
• What feedback have you had from current customers who’ve bought your product/service?
• How do you plan to grow this business?

It’s amazing to see how some entrepreneurs go along way down the track without knowing a whole lot about their industry, the market, other players and generally what’s happening.

They don’t know where their opportunity lies in the scheme of things, nor know who has come and gone before them and why.

It’s a huge risk to have a founder who has no intimate knowledge of their industry or sector with limited experience. A lack of experience is fine if the energy, motivation and willingness to learn is there; assuming they’re a great operator with a great market opportunity.

Often, the opportunity lies in being able to help fill many voids as an experienced entrepreneur is less likely to need help and more likely to want more for less.

The ability to fast track growth cleanly and smoothly and add genuine value based on my experience, knowledge and networks is what I am looking for.

Assessing the deal

Does the founder have realistic expectations given that they need help, and most likely a lot of help, where their business would otherwise fail?

• What are you looking for specifically now to grow – cash, resources, contacts, expertise?
• What are you willing to give up?
• Could I replicate what has currently been done in a short amount of time for a fraction of what the current owner has spent?
• Is there anything that’s compellingly unique that provides some protection against new entrants?
• Do I like these guys – could I hang out with them day to day?
• Are they future leaders?
• Do they listen and want to learn?
• Can I add genuine value to this business?
• Do I understand the associated risks with this business and industry and can they be managed?
• Am I passionate about this industry, product or service offering?
• Is it worthwhile my time, energy, resources and commitment?

In a nutshell, there is no shortage of opportunities, but there is definitely a shortage of good people with good opportunities that meet your criteria at a deal that is worth your while! It’s a long-term investment with any new business, particularly if you are willing to be ‘hands on’ rather than a pure cash investor.

My hit rate and likelihood of success has significantly improved as my experience grows and my screening process gets better, although there is no secret formula. Ask any successful venture capitalist in Silicon Valley who overlooked Facebook, Google or Groupon in their early stages!

Some entrepreneurs can really surprise you and perform wildly above your expectations, and others can severely disappoint and go missing in the wilderness (literally).

When times are tough, it’s easy to spot those that choose to survive and those that choose to fail. Although this is half the fun of start-up land, which is ultimately where the risk and reward is the highest!

If you want help assessing a start-up opportunity on your behalf – feel free to contact me via www.jonathanweinstock.com.au.