When I was in college at the University of Central Florida (Go Knights!) I was introduced to many leaders in the community who had been very successful entrepreneurs that transitioned into successful angel investors and/or venture capitalists. I had the opportunity to pitch many of these investors during business plan competitions. You could think of these competitions like SharkTank, before SharkTank, with prize money instead of investment capital.
I won two business plan competitions and was finalists in a state and national competition. I received press mentions, trophies and about $20,000 in cash over two years…however I gained something far more valuable. A clear vision of what I wanted to become. I wanted to be in that chair and have entrepreneurs pitching me for investment. Not just for college competitions, but for real (I have been invited back to UCF and to UF to judge business competitions). I wanted to not only be able to pursue and invest in my own ventures, but work with other aspiring entrepreneurs and help them grow by providing business wisdom, marketing assistance and in some cases capital and/or resources invested into their venture.
After I graduated I decided to build a foundation that would allow me to learn about many types of different businesses, connect with entrepreneurs and utilize my marketing skills to help companies grow. I decided to start a marketing agency in 2009 that could serve various businesses and my own ventures. I named it Brand Advance.
Over the last five years I have personally worked with over 1,000 different businesses through Brand Advance. Many of these businesses were past the startup stage and were growth companies (over $1M in revenue). Some of these businesses sought marketing assistance to help them increase sales, but were facing problems that marketing alone doesn’t solve. You cannot market yourself out of a strategy problem (climbing up a ladder on the wrong building). Furthermore, if you have a bad product or service or poor operations then customers you obtain may have a bad experience. Therefore, obtaining more customers into a system that cannot support it (ie Marketing) can often cause more harm than good.
After working with so many companies I started to see trends. I intimately learned what I like and don’t like about different types of businesses and ventures.
I decided to create a concrete list of characteristics (criteria) for ideal startup & growth companies to:
- Recognize companies when I find them – so we can be their marketing agency or I could eventually invest in them.
- Strive to build the ventures I have in my portfolio to meet these criteria
- Help other entrepreneurs, including certain ones we work with, understand these criteria so they could have a higher likelihood of success.
I recently shared it with someone else who had come from the private equity world and he asked for a copy. I decided that many others may find value from the criteria so decided to publish it. With that said…here are my criteria…
Characteristics of ideal startup & growth companies
- The entrepreneur(s) have chosen a fertile Niche Market to target.
- Market is large enough to generate the desired target revenue, return or exit
- If market is not large enough, the entrepreneur has a clear path to expand to adjacent markets (Bowling Pin Strategy)
- There is a void in the market that is unfulfilled
- If no clear void exists, the team has an innovative approach that can save members of the market time & money, or add meaningful value in some other way.
- The entrepreneurs have taken the time to understand and assess direct and indirect competitors
- The team’s growth plan and sequencing to grab market share makes sense
- The product or service has been validated by the market either through a beta product with initial customers, or through an experiment (mock ups or prototype shared with potential customers with positive feedback received)
Customer related / Marketing
- Clear target customer is identified
- The type of customer is intimately understood.
- The customer has a true need and receives meaningful value or relief from obtaining the product or service.
- Customer has ability and authority to buy (Purchasing power and authority)
- Customer can be reached (Marketing and sales plan is clear)
- Decision making and purchasing process is clear and understood (Conversion Process)
- If the venture has multiple potential customers then each customer segment is prioritized.
- Venture can ideally benefit from network theory (viral organic growth / network effect) to increase awareness and sales
- Decision makers, or highly visible influencers, can provide effective leverage to reach many customers or prospects
- Customers are “sticky” – the business has high retention rates.
- Re-occurring revenue (ideal)
- Ability to upsell add-on offerings, upgrades or related products to customers
- High barriers to entry for competitors
- High switching costs for customers (lock in business model)
- Clear CPA (Cost per Customer Acquisition)
- LTV (Life Time Value) is significantly larger than CPA
- Economically viable and scalable model
- Product has a distinct and “marketable” advantage over competing products and/or alternatives (indirect competitors)
- If the product has not established a meaningful advantage over competing products – the product has a clear plan to gain a marketable and distinct advantage.
- If the product is a software venture – the software should be focused enough to serve a niche market well, but not rigid to prevent the product from adapting to market issues or business objectives that arise.
- Product does not win in the marketplace on price alone (Not commodity product or service)
- High profit margins
Team / Entrepreneur
- The leadership team has sound judgment, justifiable experience and integrity
- The entrepreneur is passionate, committed, focused and driven
- Entrepreneur is able to adapt to change gracefully
- The entrepreneur knows when to “explore” and when to “exploit” and can adapt his team accordingly
- The leadership has a strong ability to collaborate and work with others
- The leadership is willing to listen and understand the perspective and suggestions of others
- The entrepreneur(s) is/are not overly confident – willing to seek out advice from wise counsel when needed (Coachable)
- The entrepreneur or team has deep knowledge of the market and/or customer
- The team or entrepreneur has the ability to manage operations, people and finances
- The leadership understands financial statements & tools like cashflow, budgets and the balance sheet.
- The team has a qualified product engineer or specialist
Operations and Company Related
- No partner or investor issues that could be difficult to resolve (“dead equity”)
- No significant looming lawsuits
- There is an operational agreement in place that outlines owner (member) responsibilities and protects against unfair equity allocations.
- No substantial company debt, unless it is income producing or strategic debt.
- Scalable operational systems are in place or planned that can accommodate future customer growth.
Current Status & Existing Performance
Before choosing to invest or determining a valuation, the current status of each perspective venture should be understood. Various areas of the business should be assessed including:
- Company legal status and structure
- Current product status – Just a plan? MVP (Minimum viable product), beta, product used in market already, etc.
- Existing customer satisfaction
- Existing team & planned potential hires
- Current operational efficiency
- Brand and related assets – Does the brand match the key prospect? Review website, collateral, social media, etc.
- Sales and marketing efforts, performance and plans
- Current financial status and position (Balance sheet review)
- Current profitability (cash flow and income statement review)
I want to be clear that these criteria are not the ideal investment for everybody. For example, some people may seek to create products with mass market appeal. Based on what I’ve observed creating a mass market product that competes with many big players directly is a very costly and risky approach. I find niche businesses with the ability to expand, similar to a wedge that goes wider as it moves deeper, to be much more well founded and more likely to succeed. This criteria was also prepared to identify businesses that I would eventually want to invest in. This does not mean that businesses that don’t fit this criteria couldn’t thrive or be great lifestyle companies.
I hope that you found my fertile investment criteria to be helpful.
Dare to Dream.
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