In the past few weeks, we at Super Capital have met with several entrepreneurs who've become "de facto" investors after selling their companies. And they all told us the same story:
"I sold my business and started investing in a number of young companies. I got a bit too excited about it. Several times I lost my entire investment. Even though the business had seemed very promising on paper, and well-known funders had also gone in. I'm having trouble figuring out what to watch for before investing in a startup. What should I be looking for?
It's true, being good at business doesn't mean you'll be good at investing in startups. Even trickier, being good at finance isn't enough either! So what skills do you need to develop? At Super Capital, we believe that to be an effective Business Angel, you need a good sense for products and marketing in general, know how to understand what makes a business model strong, how to analyze a market's structure and evaluate the leader's ability to steer the ship without taking on water, and how to make the business sustainable and convince other stakeholders to get on board (employees, partners, investors, etc.).
More specifically, we are often asked what to look for in a startup before investing. What we find most important are:
1. Strong monthly revenue growth, with a gross margin that follows it.
2. A clear, already-established business model.
3. A very strong, obvious value proposition for customers (and also for providers if it's a platform).
4. The lowest possible Customer Acquisition Cost (CAC) and the highest possible Lifetime Value (LTV), at least 3x the CAC.
5. A fragmented market composed of aging players that haven't done much to innovate or go digital.
6. A team that can adapt, question itself, listen, and summarize useful advice...
What we feel should not be done:
1. Investing too much in the first round (diversify your investments!)
2. Believing you'll exit easily within 3 years (it's never easy, and you need to be thinking more like 5 to 10 years).
3. Confusing ownership and management (you're a shareholder, not co-manager).
4. Investing only because some prestigious investor has, too (many large, reputable funds end up falling for total bombs. It's part of the game, and they're big enough to absorb a loss of, say, €500k. But you're not...)
5. Investing because the founder reminds you of yourself (everyone's different and there is really no standard profile for a successful entrepreneur. In their own market, they might need a different angle than what worked for you. Maybe you're a top-down manager while she prefers a more open company. Both can work well...)
6. Investing only because the concept has already succeeded in another country/sector/format (what worked in Sweden or in the tomato market won't necessarily work in France or in the melon market)
7. Being too rigid/dogmatic with your investment criteria. It would be a real shame to miss out on the next unicorn just because its current MRR is €9k rather than €10k...