Todd Marks is the award-winning Founder and CEO of Mindgrub Technologies, the cutting-edge digital experiences agency.
First-time investors and experienced venture capitalists alike have asked me how to tell a good investment opportunity and how to catch a unicorn.
First, I dispel the myths. A driven, brilliant founder offering a first-of-its-kind product could be a pro or con. The path that the founder took to their current success does not necessarily predict what will happen in the future. Their future success starts with the right culmination of experience, need and disruption. It also requires building the right team, savvy marketing and capital.
To optimize your return on investment and identify potential unicorns, it is important to take note of the following tips when selecting companies to invest in.
1. Skip the pre-seed money stages.
VCs generally look to invest millions of dollars in a portfolio of businesses and therefore focus on seed to series A rounds. Typical investments are between hundreds of thousands to millions spread across companies with traction.
I think it’s good to avoid early friends and family rounds. A founder may present a concept that has potential, but if they’re a solopreneur or “one-man band,” they don’t have an investable business yet; they have an idea. This is an investment best suited for crowdfunding, family and friends or potentially angel investors.
Larger businesses raising B-plus rounds are typically raising tens of millions so it’s past the sweet spot for smaller VC funds. They could be exactly where larger VC funds want to invest, though.
The average age of a company receiving funding is around four years. In my experience, the odds of receiving a deal after eight years is almost nil. A company that has been at it for several years and has failed to raise its next round is also a red flag. You should be looking for the sweet spot where the company has established itself enough that it’s demonstrated a clear market opportunity without having fully exploited its market. That’s typical in the seed to series B range.
2. Evaluate if they are doing something disruptive.
By investing in a company with a truly disruptive product or service, VCs have a better chance of upside as that business rides a market wave. Select a few companies for the portfolio that are capitalizing on disruption, so there is a better chance you’ll catch a unicorn.
Diversification is essential for any investment portfolio, but it is particularly important for venture capitalists who are investing in early-stage companies. Investing in a range of companies across different sectors and stages can help mitigate the risk of a single investment failure. Additionally, diversification can provide exposure to a variety of potential market leaders, increasing the likelihood of finding a winning investment.
3. Look for the right team
Many first-time entrepreneurs don’t appreciate the importance of hiring the best team possible right from the start. As an investor, you’re not just investing in the company or product, but in the people as well. Therefore, try to focus on the team behind the company. The team’s experience, skills and track record are often more important than the product or service the company offers.
Ideally, the company will have pros in place who can oversee core areas of the business, including product development, marketing, human resources and finance. Too often, start-ups ask people to wear multiple hats, diluting their efforts and ultimately leading to weakness in one or more of these core areas.
A great team can pivot and adjust to market changes and overcome obstacles that arise. A weak team may struggle to execute even if the product is great.
4. Find the right investment level.
Too many founders underestimate how much capital they’ll need to get a business off the ground, especially those in the tech sector. They may also lack a clear understanding of how to find those funds. It may take several years after product build before the company is operating in the black.
Companies stuck in a cycle of “eating what they kill,” and reinvesting only what they’ve earned might never reach their full potential possible with a true investment partner. It’s particularly difficult for product companies to bootstrap their way to success. Markets move fast and it takes capital to grab market share.
Look for companies working with a fundraising expert as they will likely help avoid being undercapitalized.
5. Evaluate their product or service.
Look for companies with a solid product or service and an agile development process. The product should be intuitive and easy to understand. The business should understand its customers and be able to make changes readily to stay on top of the market.
I recommend that you perform a code or user experience audit and contract with an expert to give you their feedback. There is a lot of smoke and mirrors out there and you don’t want to get taken advantage of. Do the requisite diligence.
6. Look for a strong marketing spend and business plan.
Business owners often fail to put enough money into determining the market viability of their product. They may also fall short on their customer acquisition and retention spending. I find that a solid marketing strategy is an early milestone on the road to success. Companies making smart, early investments in marketing are laying the groundwork necessary to fuel their growth trajectory.
A good rule of thumb is to spend at least as much on marketing as you do on product development. Additionally, validating market demand through pre-development market research is vital. It may take seven (or more) marketing touchpoints before a new customer is acquired.
Typically VCs will scrutinize if the owner definitively knows their numbers, including their customer acquisition costs and lifetime value.
7. Be patient and learn from mistakes.
Not every investment will be successful, and successful investments may take time. By taking the time to analyze both successes and failures, VCs can identify areas for improvement and adjust their investment strategies.
By refining your investment strategy, over a period of time, I believe you can increase your chances of catching that mythical unicorn and maximizing your return.
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