Making a quick judgement about the potential of a startup company is often very challenging. Regardless of if you are considering investing in, partnering with or acquiring a startup it is important to quickly make an assessment of how likely the company is to succeed in the long run. University startups can be more challenging than others because the technology is often very complex and the management teams mixed.
The first and most obvious factor is the management team. It can be pretty easy to make an assessment if you meet the entire management team in a private meeting, but more difficult if you are just watching one member pitch or you meet just one member in a casual setting. Obviously we all want to see leadership on the management team that has significant startup experience. When someone with those apparent credentials is on the team it is important to evaluate the true depth of their experience.
I’ve seen CEOs who state they have decades of business experience, but when you dig deeper it is clear that they have had success in large corporations but not yet in a startups. There is a big difference. You also need to discern who is really making the day to day business decisions. Some startups will engage an experienced entrepreneur with a title of Chairman or co-founder when in fact they are just serving as an advisor and have limited say in the daily operations.
A second question I ask myself is “is this a problem looking for a solution or a solution to a problem”. University startups can be particularly guilty of taking a “cool” technical solution, starting a company and then trying to find someone who actually has a problem that needs that solution. Maybe they will find that market, but life is too short to risk capital or time on that approach.
To make this assessment I like to simply ask a startup “who will use your product”. A promising startup will have a focused answer that states the value. For example “Cardiologist love this product because it reduces post-operative infections by 43% in Atherectomy procedures increasing hospital reimbursement rates”. After that response I’ll ask them how big that market is and if there are other applications.
The response I don’t like to hear is a rambling list of unrelated markets with no real prioritization. That suggests that they have developed a solution and want to shotgun it to lots of markets and then hope for success.
Most investors probably have a series of other factors and questions that they use but the ones I described here can be particularly useful in evaluating university based startups. I’ll discuss some additional ideas in future blogs.