1. Experienced team
I want people who have done startups before. They tend to know what they’re doing and where they’re going much better once they’ve been through that process. I don’t mind that much if they weren’t the leader before, and not even that the previous startups failed. I’d like them to know the territory because it reduces risk.
I like a team more than a single entrepreneur. Building a business takes different skills, so ideally a team has people with diverse experience around different functions of the business: Sales, marketing, administration, and so forth.
2. Believable exits
There’s some irony here because we built our business without caring a bit about exits, but when I think like an investor, I want to know that the money I invest is going to generate money coming out of the company, going back into my bank account, later.
So it’s not just a matter of having a good business. It’s a good business that will grow well and become a business that gets acquired by a larger business in 3-5 years. A lot of good businesses will never be interesting to an acquirer. Is it scalable? Is it defensible? These things make huge differences. It’s surprising to me how many people think they can get investors interested in a people-based service business, for which the assets walk out the door every night. Products are much better for exit than services.
3. Real growth prospects
The key to investment success is making the business worth a lot more later than what it’s worth today. That takes growth. And growth is a matter of scalability and defensibility, which I included above under exits, plus the size of the market, the nature of the need, and so forth.
4. Real planning
Like many investors, I can rule out some companies just from reading a summary memo or watching a pitch presentation. But if I’m still interested after hearing the pitch and reading the summary, then I want to see a plan. Pitches without plans are obvious because they don’t have the potential to drill down into the granularity when questions come up. And of course, I like a plan that is easy to decipher and well written, but what I really look for is the pieces coming together. I want to see the conceptual links between product, marketing, sales, and financial plans. Are they aligned with each other? Do they indicate understanding the keys to success? Does this look like a plan that will be managed, that can be reviewed and revised, and will remain flexible? Or is this a plan that was done once and then forgotten? I want to see planning and management, not just a plan.
A final thought
None of this is completely predictable. Good investments will sometimes appear that don’t have all of the characteristics I’ve listed here. Still, all things being equal, this is a good filter to start with.