As an angel investor, you always have your eye out for the latest great idea that will lead to a sound investment. While all successful startups begin with a great idea, not all great ideas lead to successful startups. Before you whip that checkbook out in front of an entrepreneur, let’s look at why some startups fail.
Due diligence is an important step of any startup and hopefully you and the entrepreneur have done your fair share. Marty Zwilling offers some great tips on due diligence in his Startup Professionals Musings blog. While these tips are great for entrepreneurs, angels need this information too if you hope to make an educated assessment of the next great idea. [1]
Competitors: Zwilling first highlights how important it is to search for competitors. Is this area already saturated with players? A simple Google search can answer this question rather effectively. Unless the idea offers a new twist that is marketable, a saturated market is not one you should be interested in.
Patents: Have any patents been filed on the idea? It is very possible that the entrepreneur forgot this step, so don’t make the same mistake. Even if a filed patent has not been approved, it still puts the new idea at risk. And, don’t worry, Google offers a search for this one, too.
3rd party analysis: Does the entrepreneur have data and market analysis from a credible third party that has no invested interest in the venture? Such data is available on every industry you could think of, so do your homework. Not only will it provide market data, it will also help you to identify real customer need. Don’t bank on a product you love and might want, assuming everyone else will, too. Customers are more likely to pay for something they need.
Other considerations: Has the entrepreneur thought through the entire process? The development of a product may be very easy and inexpensive, but what are the obstacles for distribution? Is there legislation in place that will require compliance? Will the market and its channels welcome this new product or service?
I cannot stress enough how important it is that the entrepreneur have the right team in place. Any entrepreneur who believes that their idea and knowledge alone are enough to launch the next best thing is too risky an endeavor for your money.
Patrix in the Nerve Endings Firing Away blog points to the 3 main reasons why startups fail:
The first 2 obstacles must be addressed before you ever enter the scene. If an entrepreneur is introducing his or her idea to you, the action has already taken place and execution is in the works. The lack of skill can be overcome by developing and implementing the strong team. Insist on this or close the checkbook. [2]
No matter how much due diligence you put into a deal, there are no guarantees that a deal will be successful. But, even if the startup never reaches its intended success, you will have a much easier time with the news if you entered the deal with your eyes open.
Notes:
[1] All Great Ideas Don’t Make Great Startups
[2] Where do most startup ideas fail?
* For series, references are published in the last installment of the series.
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