How do you assess an investment opportunity? (2024)

USE the P.O.C.D. acronym:P: Do you believe the founders have the requisite background in the industry they want to compete in?O; Is this product / service AN ORDER of magnitude better than what exists on the market? How big is your addressable market, and can you reach it economically? What is your estimated monthly 'Burn Rate' before you break even and how long to you need to get there?C: Are the legal framework and the digital infrastructure supportive of your venture?D: Assuming all your estimates pan out, how much money do you want to raise and what percentage of ownership are you willing to relinquish for that? On the basis of your answer, does my risk /reward profile look attractive?

Another key criteria to apply: is it an existing market or a new market is getting created. A lot of companies that got funded during 2007 - 2012 in India in the eCommerce space were looking to cater to an emerging market that didn't exist - the online/digital consumer market. A few companies like Flipkart, Myntra, Lenskart ended up catering large, rapidly growing markets whereas there were many companies that focused on other verticals - like devotional needs, sporting needs etc which could not see the light at the end of the tunnel as the market for those verticals were fairly small and still not growing rapidly. Fast forward to 2023, AstroTalk is growing rapidly and catering to a large market which continues to grow bigger.

1- Market Size: Gauge potential market growth and size.2- Product Viability: Assess solution's uniqueness and scalability.3- Team: Review their expertise, adaptability, and track record.4- Business Model: Examine monetization and profitability paths.5- Competition: Identify market competitors and differentiation.6- Traction: Check for sales, user growth, or customer interest.7- Financials: Analyze projections and unit economics.8- Exit Strategy: Determine ROI via acquisition or IPO prospects.9- Due Diligence: Validate founders' background and claims.

Product/Technology for Solving a Problem: Assess the uniqueness and scalability of the product or technology. Does it offer a competitive advantage?Example 🚗: Tesla's innovative electric vehicle technology attracted venture capital because it disrupted the automotive industry with sustainable transportation solutions. 🔌🚗

Thinking about the problem you are solving is just the start. The most important question is: will people be willing to pay for it, and if so, how much?

The most consistent thing in the entrepreneurial journey may not be the vision, the product, the service, or the target customer… but there is a high chance the founding team will be there through the thick and the thin. Traits to look for:1. Humility- because they will need help, to ask for help, and to surround themselves with complementary skills. 2. Resilience- an expectation to have obstacles and doubt creep in every single day. 3. Self-awareness- understanding they are in the best position today but tomorrow can be a new problem that requires a new perspective. 4. Experience- it helps if they have navigated the rocky entrepreneurial journey before. Remember the people may be our most consistent factor. Good luck out there!

The earlier stage the company is, the more everything comes down to the team: Does the investor believe that the people across the table are - not only able - but *uniquely suited* to deliver on the presented vision.

If you look at Netflix's success, its foundation is on competitive analysis and building sustainable competitive advantage.Netflix distinguished itself from Blockbuster with a subscription and no-late-fees model. When it shifted to streaming, it further set itself apart with original content and a smart recommendation system, securing a unique and defensible competitive edge.In addition,✔️ Intellectual Property: Patents can act as barriers to competition.✔️ Customer Loyalty: Long-term relationships can fend off competitors.✔️ Economies of Scale: Large startups can undercut smaller rivals on cost.✔️ Brand Recognition: A well-known brand has a competitive edge.✔️ Supply Chain: Efficiency or ethical sourcing can be differentiators.

Competition is not always negative. Competition may also be looked as a validation, a benchmark, something to learn from, and something that keeps the team way from the feeling of complacence. Constructive competition is extremely important for any venture to keep innovating and evolving.

🧠 One of the main mindset changes is to learn to read the competitive advantage from what the customer really needs and values (which is not necessarily what they claim to need), and to avoid comparing ourselves to competitors and their functionalities. 👉 As they say, this is about the customer and its needs, not about you and your products.

I think with the startup space being highly competitive, customer retention is the key. If a startup needs to burn money extensively to retain a customer (also known as Customer Retention Cost: CRC); then long term viability and profitability will be in question for the startup. Another key challenge that startups need to mitigate is generating incremental revenue from the same customer without spending more. In other words, once you have retained the customer; the startup must be able to increase the revenue per customer without incurring significant costs and churn.

Business Model: 💰Understand the monetization strategy and sustainability of the business model.Example 🎮: Supercell's mobile game model, including in-app purchases, led to venture capital investments due to its profitable and sustainable approach. 📱💎Traction and Growth 📈: Look for evidence of user adoption, revenue growth, and customer feedback.Example 📦: Shopify gained venture capital support as it became a leading e-commerce platform, enabling businesses to thrive online. 🛒💼

When assessing an investment opportunity, understanding the profitability and cash flow (including unit economics) are very high on the list of importance. Of the many ways to do this, financial due diligence (FDD) is one of the best ways. You can do this via a Quality of Earnings (QofE), which will report on the specifics of the financials. A QofE will include validating the supporting documents of the financials, looking at concentrations (customers, vendors, products, etc.), and speaking to the actual quality of the reported earnings and how well they represent the true economics of the company. This report helps you to determine how viable and scalable the company is, and therefore assess if it's an opportunity to pursue.

This is where it all comes together. Ultimately a venture investor needs to think about what their return will look like (often expressed as a cash-on-cash multiple). Current growth, unit economics, Market size, Go-to-Market Strategy, and the big vision, all will feed into an assessment of what the return might be in an optimistic and a pessimistic scenario.

One of the key considerations seasoned investors have upfront when looking at an investment opportunity is to understand potential exit strategies. So, as a startup founder, be prepared to articulate your ideas about your exit strategies for investors, using hard data and examples from other similar deals. Don't simply state that you will IPO it, and investors will become a billionaires. The percentage of startups that reach the IPO phase is actually very low.

🚀 It is key to understand that there is no one-size-fits-all advice, and that there are many nuances to be taken into account. But as a general rule, what holds the most weight when analyzing a company depends on where the company is at the moment:- Seed: Team > Traction > Market- Series A: Market > Traction > Team- Growth: Traction > Market > Team

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Let’s also bear in mind that this topic is more nuanced, and approach (and criteria for evaluation) should be tailored to maturity of a startup, as a minimum.Focus of attention, importance/weight of individual factors, relevance and even availability of certain data points… it all depends. Hence, pre-seed will be considerably different from seed, or a growth startup. Not even mentioning specifics of evaluation of a late stage startup. For example, at seed, oftentimes, there is simply no reliable financial data or history to look at, the team still figures out its product-market fit, experiments with what works in terms of go-to-market etc.