Before You Start a Company, Ask These Three Questions
By: Mike Brown
Tags: Angel Investing, Investing, Startup

This simple exercise will help validate if you have an investable idea

Photo by Daria Nepriakhina on Unsplash

In 7 years of angel investing and hundreds of thousands of dollars sacrificed to the investment gods (and a few wins along the way), this simple framework has helped me quickly determine the quality of a startup idea — and to predict its success. While big time VC firms may have a 64 tab excel spreadsheet to model returns and require months of due diligence, I have found this easy three question test to be incredibly effective at quickly determining if a company is worth investigating further. If you are looking to launch an idea (or invest in one) running through these questions can save you a lot of time when determining whether to move forward.

Why This?

This question is usually the easiest one, which makes sense, as ideas are the easy part of starting a company. But take the time to really question why this idea is unique or special, and why it stands out in sea of good ideas. What are the key differentiators? Why is this different than what has already been done in the space, or is currently being done by competitors? What pain point is this idea going to solve? By the way, a great company does not have to have a unique offering — sometimes the uniqueness can be in flawless execution of a simple concept. For example, I have a friend starting a bookkeeping company — a crowded space with lots of competition with the same basic offering. However, his key differentiator is that his company actually keeps the books throughout the year, rather than scrambling at tax time — and after having to fire a legion of bookkeepers, this would solve a massive pain point for many entrepreneurs, and that is enough to sell me.

Why Now?

This one is a little tougher — just ask any VR startup in the last ten years. Just because a technology is exciting doesn’t mean there is a demand for it. Timing is everything when it comes to startups. Being too early might mean your company is the future Myspace of your industry, while starting the sixth scooter rental company in your city makes customer acquisition a tall order. There are hundreds of potentially great companies relegated to the ash heap of broken dreams because they failed to consider the timing of their launch. Started a mask company in January? Nailed it. Concert venue? Not so much. While a global pandemic isn’t something that is exactly predictable, giving careful consideration to the economic climate, consumer demand, and even seasonality may have a huge impact on the success of your venture. Luck is certainly a factor when it comes to nailing timing, but a deep dive on this question will ensure that you don’t miss any potentially avoidable pitfalls.

Why Us?

The third and final question is the most difficult. Just because founders have a smart and timely idea doesn’t mean they are the right team to execute on it. A lot of investors say they invest in people and not ideas, but this means a whole lot more than just the character of the founder. When I am considering a founding team I am always looking for some x factor that gives them an outsize advantage in the competitive landscape. This could come in the form of specific industry expertise, insider knowledge from a former employer or startup, or even experience from a previous failure. Say a team is pitching a LinkedIn-meets-Tinder hiring platform — not a particularly unique or compelling idea. However, if I find out that the founder worked at LinkedIn for eight years and her former boss is the current head of acquisitions, all of a sudden things get a lot more interesting. While we all wish that the world was a meritocracy, the hard truth is that connections and industry experience matter. Not to take away anything from first time founders going for a radical career change, but the leverage that can be gained from spending years in an industry prior to launching a new venture can’t be understated.

While this framework certainly isn’t a comprehensive model for vetting a startup, it does provide a useful starting point. Let’s face it — startups are hard. There are so many factors that affect whether a startup is successful, and you certainly don’t want to be swimming upstream. However, if any of these questions give you pause, you may be saving yourself a lot of blood, sweat and tears by reevaluating if this is the right idea, at the right time, with the right founders.