High time to lift the veil of secrecy and explain how startups should get prepared for fundraising. Below we will tell you what investors pay special attention to while making their investment decisions.
Unicorn
There is an evident startup boom in the market nowadays, the number of new innovative projects grows exponentially all around the world. But the truth is that all entrepreneurs are mainly looking for unicorns. This term was first mentioned by Aileen Lee (a U.S. seed investor) in 2013 in order to describe startups with a capitalization exceeding 1 bln dollars. According to Insider Pro, it took 2 years for WhatsApp messenger to reach the 1 bln mark, Uber did the same in 2,2 months. At the same time, typical companies from Fortune500 list need more than 20 years to have the same capitalization.
Venture ecosystem transformation
Startups’ capitalization increases times as fast as of “standard” companies. This fact attracts the most ambitious entrepreneurs in this field. Startup revolution keeps gaining momentum, innovative projects fundraised more than 140 billion dollars of venture investments in 2017. Quite an impressive sum, isn’t it? But it is a common knowledge that nearly 90% of all startups “die”, half of them closes during the first 5 years of their “lives”. Risks of managing or financing early-stage startups are very high.
It is necessary to unify approaches and evaluation criteria of innovative projects in order to let investors understand if a startup is worth paying any attention to and to let the startup know the backer’s requirements at all investment stages. This is the global aim that Rocket DAO is working on, developing a decentralized investing platform. Eventually, it will be a communication instrument uniting investors, startups and experts - the most important players in the venture ecosystem.
Insights
We have identified 10 key parameters critical for startups:
- Product
- Business model
- Market
- Team
- Technology
- Financial model
- Legal risks
- Risks
- PR and marketing
- Resources and assets
We asked Rocket DAO experts to answer a question: which characteristics should a startup have in order to be valued at 1 billion.
TEAM
Human potential influences directly the project’s potential success. Independent blockchain consultant Sergei Lavrinenko describes the optimal team structure as follows:
— A perfect team should have a good combination of commercial, product and technology competencies. The higher the previous accomplishments of the team members are in these three parameters, the higher is the overall evaluation score. A one billion startup team should have a world-wide known scientist, responsible for the product, an experienced businessman responsible for sales and a proficient CTO who is able to turn an idea into a high-quality software. But the truth is that the number of such teams is very small (if they do exist at all). But still, such criteria and such parameters display the level and quality of competencies necessary for a startup’s success. Assessing these professional parameters clarifies which aspects should be improved.
PRODUCT and BUSINESS MODEL
A good product is the best marketing instrument. At the same time, a working and realistic business model is the guarantee that the project will be able to generate income. That is what TRIZ expert from EPAM Systems Andrew Kuryan thinks about it:
— Hamburg school claims that the only success criterion for any project is the measure of the public good it generates. This public good is actually the number of people who directly or indirectly benefit from the company’s activities. In other words, this is the number of people who purchase or use products (or services) of the company. From this point of view, the company's revenue illustrates the public good in quantitative measurement.
So what does a startup need to succeed?
- According to Clayton Christensen, the author of the Disruptive innovation theory, clients hire a product for specific task performance (Jobs-To-Be-Done concept), it means that a product or a service should solve a specific topical problem of the target audience (for example, Gmail manages mailing operations perfectly well).
Products and services are to be created for a big number of people. The more users, the better is the overall worldwide impact of the product. - The company has to grow constantly. Jim Collins, the author of the work “Good to Great” says that a company may be become "great" only if it demonstrates simultaneous growth in incomes sales, the number of clients and ROI during 15 years and more. Such a trend proofs that the company keeps producing public good on а bigger scale.
- The company should be profitable. In order to produce and spread products/services, a company has to purchase resources and hire staff. So a company has to earn more than it spends on resources and employees so that to create value in the long-term period.
- The company’s activities should be cost-effective. If the company’s profitability is above average market indicators it will succeed in attracting investments necessary for further growth and development.
Summing up, a startup may succeed only if it has the right product and a correct business model. The right product will create value for users (p.1-2), while the correct business model (p.2-5) will provide the project with the instruments letting spread this value to as more people as possible and guarantee company’s growth.
MARKET, MARKETING, PR
Chief innovation officer in IsSoft, the author of the market potential and marketing policy evaluation methodologies Alexander Drobyshevski gives a clear explanation of the requirements addressed to startups:
— It is important to understand that startup analysis should be conducted from the investor’s point of view who has to take into account a wide range of parameters, including market, team, business model, risks, products, etc.
Assessing the target market an investor should pay special attention to:
- Market type (geography, sophistication, segmentation, rules, growth rate) and its growth potential;
- Market size demonstrates how well does the startup team understand its target audience in each market region and segment;
- Competition level - this parameter is to be assessed with the analysis of direct competitors only and products-substitutes; this will demonstrate if a startup team has a good understanding of the competitive environment and know how to protect their position under the competitive pressures;
- Barriers (legal, technological, commercial barriers, access to clients): a startup should be able to circumvent market patent barriers and even have potential to set itself a higher technological barrier for new market players.
Analyzing PR and marketing campaigns investor should, first of all, assess the overall approach of the team to these activities:
- This function should not be supplementary (ballast) for the team member responsible for a different group of functions; this activity is very important for collaboration with professional media and final customers, so it takes time to perform it properly;
- There should be a specified and timely performed plan of the promotion events with effectiveness evaluation;
- Regular publications in the professional media are a good signal as well;
- It is necessary for a startup to have communication platforms (like social media networks, messengers, blogs) for constant interactions with potential clients, a growing database of such clients will show that the product is in high demand in the market.
The sooner the startup has an established communication model with potential customers, the lower PR costs will be in the future.
The proof-of-work of such an approach is the successfully conducted Due Diligence for a crypto-wallet startup Multy which is available here.
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