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Five elements venture capitalists can use to evaluate startups

Innovation is the only thing that drives the market in a reasonable direction. And innovation needs capital.

Investments in start-ups have never been as popular, because of the market’s demand for disruption. However, there is a lot of confusion around the relationship between an investor and an entrepreneur. On the internet, this is a topic that is treated rather superficially.

The web is already full of experts who give golden advice to start-ups. However, there isn’t a lot of actionable content for investors out there. This is what this article is aimed at—to teach investors about the 5 elements that are essential in evaluating startups.

Problem validation-the foundation

The first is the magnitude of the problem that the start-up aims to solve. This gives us the measure of the reference market and the startup’s maturity. It also gives us insight into the potential profitability of the venture. The worse the problem is, the more the demand will be for a solution. Ergo, more opportunities for market penetration.

Solution validation-the bricks

You must see how much the value proposition of the start-up differs from that of competitors on the market. This difference can exist in several forms like technology, usability, or even vision itself. The more clarity and ammunition a startup will have, the better the chances for it to create a disruption.

Remember—you need startups that can do well even with moderate funding and minimal equipment. This is where you can identify the passion, determination, and innovation of a team.

The team-the blueprint

The ideal team of a start-up is heterogeneous—made up of profiles with different skill sets. Common denominators need to be innovation and the ability to work as a team. It’s good to hire people that are positive, creative, and cooperative. It is also imperative you exclude negative elements from the start-up as an indispensable condition for our investment.

The team’s collective vision and positivity is what will drive the startup. You need to make sure all team members are passionate about what they do and open to collaborating. The team acts like the backbone of the enterprise. This is where you need to be very selective.

Business model-the pillar

How and when the start-up creates profit is the baseline for determining future success. There are two characteristics to keep an eye on—scalability and the speed of diffusion, or rather the speed with which the market and potential customers will adopt the product/service.

Economic risk-the roof

You should see how much your economic risk is commensurate with the general strategy of the start-up. You must be careful not to invest too little with respect to the requirement of the general strategy, and on the other hand, you must be careful not to invest too much with respect to the needs of the goal you want to achieve.

Financial management is the key when you’re involved with a startup. It is all about making the best of your budget while keeping the brand vision and product quality intact—and it all starts before investing itself.

One last piece of advice I want to give is that often start-ups do not only need capital contributions but also to acquire managerial know-how. This sweetens the deal for the entrepreneurs and ensures success for the investors. So, choose the most ambitious team—the one that challenges the status quo, and give them a boost with managerial support. Even if the risk will be higher, if successful, the return on investment will be unimaginable. And remember—these five elements are what will make or break a startup in the long run!

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