How Do You Assess the Viability of a Startup?
Navigating the complex landscape of startup viability requires more than just a keen eye; it demands expert insights. This article distills wisdom from seasoned professionals to help discern the potential of new ventures. Delve into a comprehensive exploration of key factors that signal a startup's prospects for success.
- Focus on Problem, Product, and People
- Evaluate Founding Team's Adaptability
- Assess Model Training and Data Quality
- Examine Founder’s Vision and Adaptability
- Analyze Unit Economics and Scalability
- Use Founder-Market-Metrics Triangle Assessment
- Check Cash Flow and Operating Expenses
- Review Unit Economics and Acquisition Costs
- Prioritize Founding Team’s Adaptability
- Focus on Customer Acquisition and Retention
- Analyze Unit Economics and Acquisition Costs
- Evaluate Technical Foundations and Processes
- Consider Market Timing and Urgency
- Conduct Due Diligence on Founder and Team
- Analyze Cash Runway and Burn Rate
- Study User Engagement and Adoption
- Assess Problem-Solution Fit and Feedback
Focus on Problem, Product, and People
When evaluating a startup, I focus on the 3 P's: Problem, Product, and People.
1. Problem: Is the startup solving a real, urgent problem? Great startups target pain points people or businesses can't ignore. I look for evidence of demand-waitlists, early customers, or market data-showing the problem is big and worth solving.
2. Product: Does the product (or even a prototype) show signs of traction? I'm not looking for perfection, but I want to see if they've tested their idea and gotten real-world feedback. Bonus points if they're doing things that don't scale early on to deeply understand their users.
3. People: Are the founders resilient, resourceful, and coachable? I care less about their résumés and more about how they handle challenges. A strong team that learns fast can pivot when needed, which is crucial in early-stage investing.
Beyond the 3 P's, I always ask: "Would I use this product or recommend it to someone I know?" If the answer is no, I dig deeper. Investing is about backing not just ideas but the energy and execution behind them.
Evaluate Founding Team's Adaptability
One strategy I use to assess the viability of a startup is looking at the founding team and their ability to pivot. I learned this lesson the hard way early in my career. There was one startup I was really excited about—great product, solid market demand—but the founders were rigid in their approach. When market conditions shifted, they couldn't adapt quickly enough. As a result, the business didn't survive.
Since then, I've made it a point to focus on how adaptable the founding team is. Are they open to feedback? Do they have experience in overcoming challenges? A great product is important, but if the team can't adjust to market demands or unforeseen obstacles, the startup won't last. I like to sit down with the founders and understand their vision, but also how they've handled adversity in the past.
For example, I recently invested in a startup where the founders had previously failed in another venture. Instead of seeing that as a red flag, I saw it as a valuable lesson. They learned from their mistakes, and when they launched their new business, they approached it with a far more flexible and strategic mindset. That adaptability made all the difference.
Assess Model Training and Data Quality
As an IT consultant who's evaluated numerous AI startups, I always dig deep into their model training processes and data quality - not just the flashy demos they show investors. Last month, I passed on investing in what seemed like a promising AI startup because their training data wasn't diverse enough, which would've limited their ability to scale across different user demographics.
Examine Founder’s Vision and Adaptability
In my role, I work closely with startups and make investment decisions based on a thorough evaluation process. One key strategy I always use is assessing the founder's vision and adaptability. It's crucial to understand not only what the founder is trying to achieve, but how they're approaching challenges and evolving their business model over time.
A startup's initial idea might not always be the one that succeeds, and I look for founders who can adapt quickly, pivot when necessary, and keep refining their approach. This ability to adapt is especially important when the market changes or when unexpected challenges arise, something that happens frequently with early-stage businesses.
For example, a few months ago, we evaluated a startup in the health tech space. While their initial product had potential, the founder had already pivoted once before to better meet market needs. This showed me their commitment to learning from feedback and continuously improving. I find this level of flexibility important because it's not just about having a great idea; it's about having the ability to execute and adjust as circumstances evolve.
At the same time, I make sure the founder has a strong team in place. A founder might have a great vision, but if they can't build and lead an effective team, it's a red flag. I look for signs of strong leadership, team cohesion, and a culture of accountability.
By focusing on the founder's ability to adapt and lead, I get a clearer picture of whether the startup is poised for long-term success. This approach has helped me make better decisions and reduce the risk of investing in a business that may not be sustainable.
Analyze Unit Economics and Scalability
I've learned from raising $2.5m that unit economics and scalability potential are my top assessment criteria. When I evaluated a sustainable fashion marketplace last month, their customer acquisition cost was 3x industry average, which raised major concerns despite their impressive growth numbers. I usually dig deep into their operational workflows and supply chain processes since these often reveal hidden costs that can make or break scalability - something I experienced firsthand while building SupplyCompass.
Use Founder-Market-Metrics Triangle Assessment
Through my experience at Spectup working with over 100 startups, I've developed what I call the "founder-market-metrics" triangle assessment. During my time at BMW Startup Garage, I learned that successful startups need more than just a good product - they need founders who deeply understand their market and can execute effectively. At Spectup, we always start by looking at the founding team's experience and their ability to adapt, something I first noticed was crucial during my time at N26. One particular approach we use is asking founders to walk us through their worst business decision and what they learned from it - you'd be amazed how much this reveals about their problem-solving abilities and self-awareness. My experience at Deloitte's Innovation & Ventures team taught me to look beyond the typical metrics and examine the startup's relationship with early customers - strong customer feedback and engagement often predict future success better than financial projections alone. We also pay close attention to how founders use their existing resources - I've seen too many startups with great ideas fail because they couldn't manage their runway effectively. At Spectup, we've found that startups showing strong unit economics, even at a small scale, typically have better chances of long-term success than those focusing solely on growth.
Check Cash Flow and Operating Expenses
I've found that examining a startup's ability to manage cash flow and operating expenses is crucial, just like how I analyze potential property investments. When I recently evaluated a PropTech startup, I looked at their burn rate and revenue projections but also dug into their team's real estate industry experience and track record of executing similar projects.
Review Unit Economics and Acquisition Costs
Having reviewed dozens of startups in the financial tech space, I've learned to focus heavily on their unit economics and customer acquisition costs. Last year, I passed on investing in a promising startup because their customer acquisition cost was $500 while lifetime value was only $300 - the math just didn't work out. I always suggest fellow investors to look beyond fancy pitch decks and dig into these core metrics first, as they tell the real story of sustainable growth.
Prioritize Founding Team’s Adaptability
I look closely at the founding team's ability to adapt and pivot, which I learned firsthand while building All Exhibit through various market changes. Recently, I passed on investing in a promising startup because despite great financials, their team couldn't clearly explain how they'd handle major competitors or adjust their strategy if their initial approach didn't work.
Focus on Customer Acquisition and Retention
After reviewing dozens of healthcare startups at Aetna Interactive, I've learned to focus on their customer acquisition costs and retention metrics rather than just their total user numbers. Just last quarter, I invested in a telehealth platform because they demonstrated sustainable growth with a clear path to profitability, showing they could acquire new users for under $100 while maintaining an 80% retention rate.
Analyze Unit Economics and Acquisition Costs
I primarily focus on analyzing the startup's unit economics and customer acquisition costs, which I learned the hard way after a few early investment mistakes. When evaluating an insurtech startup recently, I discovered their customer acquisition cost was three times higher than the industry average, which saved me from a potentially poor investment despite their attractive growth numbers. I generally look for startups that can break even on customer acquisition within 12-18 months, as this has been a reliable indicator of sustainable growth in my portfolio.
Evaluate Technical Foundations and Processes
I recently started evaluating startups' technical foundations by diving into their GitHub repositories and development processes, which has helped me spot potential red flags early on. When I invested in a machine learning startup last year, their clean code architecture and detailed documentation showed me they had the technical depth to execute their vision, and they've since doubled their user base. I generally look for founders who can explain complex technical concepts simply, as I've found this indicates both expertise and the ability to attract talent and customers.
Consider Market Timing and Urgency
I focus heavily on the startup's market timing and whether their solution addresses a genuine, pressing problem that customers are willing to pay for right now. Just last quarter, I was evaluating a fintech startup and while their technology was impressive, I noticed their target market wasn't showing enough urgent demand for their solution, which made me hesitate on investing.
Conduct Due Diligence on Founder and Team
One key strategy investment professionals use to assess the viability of a startup is conducting due diligence with a focus on the founder and team dynamics. Beyond reviewing financials, market potential, and product viability, investors often prioritize evaluating the founder's experience, leadership, and ability to adapt to challenges.
This involves examining the founder's track record in relevant industries, their problem-solving skills, and their vision for the company. A well-rounded and complementary team is equally critical, as startups with strong, cohesive teams are more likely to navigate setbacks and scale effectively.
Investors also assess the startup's market validation and traction, looking for evidence such as customer testimonials, preorders, or partnerships that indicate demand and potential for growth. Coupling this with an analysis of the startup's competitive differentiation helps ensure that the business addresses a unique problem or offers a superior solution.
Analyze Cash Runway and Burn Rate
In my experience managing over $1.2B in assets, I've found that analyzing a startup's cash runway and burn rate is absolutely crucial before investing. Recently, I evaluated a promising AI startup that had 18 months of runway with current burn rate, which gave us enough confidence to move forward because they had time to hit key milestones. I typically look for at least 12-18 months of runway, as it gives startups breathing room to achieve product-market fit without immediately needing another funding round.
Study User Engagement and Adoption
I've found that studying user engagement metrics and early adoption patterns gives me the clearest picture of a startup's potential, especially in the B2B SaaS space. Last quarter, I passed on investing in a promising-looking startup because their free trial conversion rate was below 5%, despite their flashy pitch deck and impressive team. I typically want to see at least three months of growing user retention and organic referrals before considering an investment, as these metrics have consistently predicted success in my experience.
Assess Problem-Solution Fit and Feedback
Having gone through the startup journey myself with CBDNerds, I pay close attention to the problem-solution fit and early user feedback. Last year, I passed on investing in what seemed like a promising delivery app because their beta users were giving mixed reviews about the core functionality, even though their pitch deck looked great. I always ask founders to show me their customer feedback channels and how they're iterating based on real user input - it's a red flag if they can't demonstrate this.
