Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
It has never been easier to start a tech startup. However, this low barrier to entry means that the competition is also fierce, and early-stage businesses can fail quickly. As investors, how can you spot those rare startups which could turn into the next Google, Apple or Amazon – sifting out the dross? In this article, our investment team at Bure Valley Group offers some guiding principles to help investors spot a great tech startup idea.
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A quality team
No ship can sail without its captain, and a captain is worthless without a good crew. The same is true for tech startups. Most early-stage investors know that investing in startups, by and large, involves investing in the people behind the business idea – not just the idea itself.
Are the people in the team talented, experienced and passionate? Have founders shown that they are prepared to make the necessary sacrifices to get their idea off the ground? Have they shown that they are trustworthy?
How will the founder ensure that the team remains excellent as it grows?
Market size & potential
How many people – or organisations – could the startup’s product or service potentially be sold to? After all, this largely determines how much the business can grow.
The market itself does not need to be enormous. For instance, the startup could be the only player (or one of a few) within a relatively small market, with a high barrier to entry for other businesses and a high margin potential.
Another thing to consider is market potential down the line. Could the tech startup’s product be offered to another market, perhaps when the core market is saturated? Are there other viable ideas in the pipeline which could be up/cross-sold to the core market in the future, or to another marketplace? If so, it will be important to “map” the competitive landscape of these markets, too.
Founder vested interests
Are the key people in the tech startup personally invested in the business? If they have quit their jobs to give their attention full-time to the startup, this suggests they strongly believe in the idea.
Another good sign is if investors have put a lot of their own savings into their startup. Also, has a mock-up or prototype of the core product(s) been developed and tested in the marketplace, yet?
Investors will feel more comfortable getting on board an idea which has proof of concept. If no skin is in the game, however, then this can suggest the founders lack confidence in their idea.
Patents & IP
Given how quickly almost anyone can start up a tech business these days, what’s to stop rivals taking the startup’s idea and selling it? Here, a patent or proof of intellectual property (IPO) can be a big source of comfort for investors.
Again, this shows that founders believe enough in an idea to spend time, money and legal effort protecting it. In a viable market, moreover, a patent can give a startup a “free run” to customers.
Viable business model
How will the startup make money? What are the margins like on the product sales, and do these allow for future scalability of the business?
It is still amazing how many business founders fail to think about how their idea will turn a profit. As investors, it is important to weed these people out. A key consideration here is exit strategy. Have founders thought about how they will sell their company, or share in it?
Distribution channels are also important. How will the product arrive to the customer once it has been purchased? Also, what about marketing – what channels will be used to acquire leads?
Risk mitigation
Any startup investment is inherently more risky than, say, investing in a publicly-listed company with a strong set of financial statements. The latter have established brands, more assets (to weather economic storms) and proof of concept behind them.
Tech startups, however, typically have more growth potential – if they can address risks along the way. Here, investors should look out for an awareness amongst the founders about what these risks are and how they can be avoided/minimised.
At the very least, founders should have a strong SWOT analysis ready to present to investors (Strengths, Weaknesses, Opportunities and Threats). Does this look comprehensive enough, and have realistic solutions been presented to address weaknesses and threats? Or, have they merely been glossed over?
Founders should demonstrate a clear understanding of both their competitors and customers. Without the latter, the startup will go nowhere. The former, moreover, is the biggest threat to market share. Other considerations might include:
- Regulation. How might laws shape the course of the startup’s business journey? For instance, if the tech startup operates in financial services (fintech), could compliance issues derail the product, service or business model down the line?
- Economic trends/events. COVID-19 brought in an unprecedented era of working from home and nationwide quarantine. How might the startup cope in similar conditions, or during a recession of some kind? What about other geopolitical factors, such as the UK-EU relationship after Brexit?
Invitation
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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