Evaluating Startups

How do you assess the potential of a startup, when deciding whether to allocate time or treasure to it? Here’s what I do.

First, eliminate 80% of the pack by asking for evidence that “the dog will eat the dogfood” — that customers will buy what the company will sell, in sufficient quantities to make the effort worthwhile.

It doesn’t have to quantitative evidence, or proof, per se, in the form of market traction. But, at the most basic level, the questions I most often ask of early stage entrepreneurs are questions related to whether they’re solving a problem the world really has.

I’ll say it again: This eliminates 80% of startups from my consideration pool. Not that they’ll all fail, just that they’re not a good bet for me.

Once you’re past that gate, I’m concerned primarily with the team. Are the people on this team people with whom I’m interested in building a relationship that might endure past the frame of this opportunity? Where the answer is no, it usually makes sense for me to walk away. Where the answer is yes, I have rarely gone horribly wrong committing to them in one way or another.

In that subset of companies… the <5% in which I’m convinced the dog will eat the dogfood, and the team is comprised of people worth investing time and energy on over the long haul, it’s a simple question of my own resource limitations. With $100MM to invest, I’d write every one of them a check, and do fine. Without a day job or a family, I’d spend time with each and every one of them, and sleep like a baby.

Without either of those luxuries, it’s really a question of gut feel.

But winging it on the top 5% has a lot better odds of success than winging it from the get-go. And in the end, that’s what the smart money does.