What Do We Look for in Early Stage Businesses/Start-Ups?

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At Shadow Foundr, the businesses we come across in deal origination can be divided into two categorises – pre-traction and post-traction.

Pre-traction generally means a company is yet to have its product in the market, has no established user-base, nor has it started generating revenue. These companies are more than likely somewhere between idea-stage and MVP (Minimum Viable Product), sometimes even operating in “stealth mode”, for fear of giving away their ideas.

There are lots of hurdles to go through in order to take an idea from the back of a napkin, to executing a business plan and building a product, to eventually bringing it to market. That’s why, in order to mitigate risk for our investor base, we tend to focus mostly on post-traction opportunities – those that are beyond proof-of-concept, have contracts in place and ideally are generating recurring revenue.

Some angel investors refuse to even take meetings with founders that don’t have their product in the market. When you are a first-time founder, unless you get lucky, you are expected to bootstrap your venture to get some traction, before seeking angel investor funding.

Seasoned founders, those who have gone through the process and delivered for investors previously, can usually fund their start-ups with their own resources in the beginning and even obtain funding from their established networks, based simply on an idea. But that’s not generally the case for founders new to the start-up world.

For those founders, it is vital for them to be able to demonstrate they are solving a genuine problem and own valuable Intellectual Property, that cannot easily be copied.

Furthermore, as most of the start-ups in an angel investor’s portfolio (c. 20-30 companies) tend to fail or return only the amount originally invested, the winners (sometimes just one company) need to outweigh an investor’s losses and achieve outstanding returns. So, every company that we select needs to have a potential to deliver at least 10-20x returns.

Scalable and disruptive ventures with reasonable valuations can achieve this kind of growth in value. The trick is getting in at the right time – not too early, and certainly not after the best value has been realised. Founders need to show ambition and vision on how they can scale their companies.

In terms of traction, we look for a healthy combination of the following:

  • Revenue generating;
  • Own (and protected) valuable Intellectual Property;
  • Have proof-of-concept, beyond MVP stage;
  • Can attract early investment through their own networks and associations;
  • Outstanding team in place, with relevant experience.

Finally, to reiterate this last point, before deciding if a company can be successful, we aim to determine if a founder can be.

As the original vision and the market situation can (and usually does) change, pivoting might be necessary. But the company with the right team in place is well positioned to execute expertly and effectively weather all possible changes and challenges that start-ups and early-stage businesses experience.

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