The rise in startup incubators and the fruitful projects, particularly in internet and technology area, have led investors focus on innovative entrepreneurs. There are many startup incubators who provide entrepreneurs with support and advice on their business strategies, business growth and the opportunity to meet important actors of the ecosystem. Similarly, investors with an aim to invest in new ideas create their own ecosystem under the angel investor name and look for projects which will stand out among its competitors.
Despite the fact that there are many entrepreneurs attending these accelerator programs every year, few of them manage to commercialize their project and create a revenue generating system. In order to succeed, an entrepreneur should create its strategy correctly from the first stage and understand well what is required to grow and protect the value created. This also means establishing a strong foundation for future fundraising opportunities because, when making an investment, investors review the legal and financial structure of the startup project in addition to the innovative idea of the startup. Therefore the below criteria should also be taken into consideration by all entrepreneurs, as well as investors:
- Business Model and Product: One of the major criteria for investors is to see if the idea is converted into a solid business plan, thus the abstract "idea" becomes a tangible "product" or "service". The projects which complete the business modelling phase are taken into consideration with priority since this phase also allows the investor to analyze the required investment amount and the proper method of investment. That makes it one of the first questions which should be asked for an investment decision.
- Revenue Model and Commercialization Strategy: It is important for a startup to have a strategy on how to commercialize its idea and which income model to adopt. This strategy provides a financial prediction for the investor and an analysis for both parties on things required for standing out amongst competitor products and services.
- Legal Protection of Project/Idea: Another vital issue for a startup is to protect the project and the idea against illegal reproduction, counterfeit and unfair competition. If the outcome of the project is a product which may benefit from intellectual and industrial property protection, required registrations and protection mechanisms should be completed. In terms of products and know-how which do not fall under the scope of intellectual and industrial property protection the protection against illegal reproduction and counterfeit should be adopted with alternative methods. Otherwise, there will be no product worth investing in.
- Startup Team: Investors pay attention to resumes, industry expertise and working model (employee, partner or consultant) of founders and employees of the startup team as well as their stock option plans in the company. This is because the success of the project, the adaptability to changes in the commercialization process and the proprietary rights in the company/product are issues directly related to the startup team.
- Target Market and Customers: Target market, number of customers, customer profile, growth rate of customer portfolio and similar data are taken into consideration for evaluating the company value and future business strategies.
- Shareholder Structure and Shares: Types of shares, privileged shares and shareholders are other main headings affecting the investment decision.
- Legal and Financial Due Diligence: Prior to making any investments, an investor will request from his lawyers and financial advisors to conduct a due diligence on startup's records and evaluate the risks. In other words, investor will examine transactions of the startup made since its establishment and their compliance with legal and financial legislation. Thus it is for the benefit of startups to carefully draft their employee, credit, product development and collaboration agreements; duly keep their company ledgers and records and comply with their tax liabilities in order to act as a prudent businessman and to be ready for future investment/fundraising opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.