Understanding what you need to prove to become an investable startup

Not all startups were born alike. Different startups need to prove different things. In this post I will present one way to break apart the different models startups can be built upon and accordingly some of the main things you will need to prove.

The Scale – Value spectrum:

 

Scale Company: Twitter, Airbnb

If you intended to have millions of users you are on the scale side of the spectrum. The business model generally entails creating a narrow value proposition which is relevant for a huge amount of people. After scale is achieved different monetization options (e.g. Advertising, commission, etc.) allow a relatively small amount revenue creation per user (which when multiplied by millions of users creates a big company).

What you need to prove:

  • Early traction – In today’s environment you need to have a prototype and show that users love it, use it and tweet about. Take a look at these metrics to better understand what you need to show.
  • Strong trajectory – In addition to having users, you want to show strong growth and milestones being met. Milestones can be the addition of: features, team members, advisers, PR, etc.
  • Innovative team – In a consumer play my belief is that experience matters less than being super smart and innovative. You want to be quick on your feet, analytical and creative.
  • Large Vision – Starting small and showing traction is great; to be funded you want to show where you are headed, what’s the larger vision who will make this small app into a huge company?

Value Company: A123 systems, Intigua

If you intended to have hundreds or thousands of customers charging each a substantial amount you’re on the “Value” side of the spectrum.

What you need to prove:

  • Product Value – The product you intended to build will actually create a huge amount of value and is addressing a market pain point (which is also large enough and hopefully growing)
  • Build Time – You will be able to build the product within a timeframe that is cost efficient and competitive.
  • Sales Cycles – You will be able to deal with the longer and complex enterprise sales that are needed to produce revenues.
  • Barriers to Entry – You have or will create barriers to entry in order to block competitors and maintain the value of the product you are creating.

Scale- Value Midrange: Mozy, Socrative (my startup)

If you intend to have tens or hundreds of thousands of customers (but not millions) you are in this category.

What you need to prove:

Well this case is a bit more complex and unique and the answer is: it depends.  Generally it will be some combination of the two things above, and it will depend where on the value-scale spectrum you stand. I think that a good starting point is to assume you need to prove all eight points above, but each to a lesser extent (i.e. less growth, less value creation, etc.)  So it ends up you need to prove more things, but you can have less prof points for each.

As always, I hope this helps break apart a complex topic and bring a bit more clarity into the world. Comments and suggestions are much appreciated and I look forward to hearing your thoughts.

Amit Maimon

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