How to Assess a Startup’s Business Model
Looking at a startup’s business model is one of the first things you should do when considering an investment. To get the most thorough results, you’ll want to make sure that there are a few questions specifically addressing the business model as you go through the due diligence process.
To get started, though, there are three main things you should look at when considering a startup’s business model:
Market Size
The market size for a particular company can be a major factor in its potential success. The size of the market is usually inversely proportional to the probable success of the company. That is to say, the more crowded the market, the lower the likelihood of making a return.
Of course, everyone is interested in standout companies in an open market. Just as many people are interested in leisure trips to the moon. In reality, there is always going to be some level of risk in terms of entering any market. What you can do is investigate the market as best you can to reassure yourself that the company you want to invest in won’t be crowded out by a bunch of duplicates.
Significant Unmet Needs
Products that meet the needs of the market are likely to perform better than those where there are many varied solutions. In this case, you want to make sure that the need being met will cause a significant change in the market. While it doesn’t necessarily have to be the first of its kind, the underlying technology and its intended application should be unique.
Deep space exploration company Positron Dynamics is a good example. Using antimatter particles, Positron has developed a means of propelling explorers deeper into space than ever before. The issues involved in deep space travel are a longstanding industry hurdle. By increasing the speed at which spacecraft can travel, Positron Dynamics could meet a need that has plagued the space industry since we first set foot on the moon.
Validated Revenue Model
If the company is far enough along that they’re seeking angel funding, they should have a revenue model to show you. When examining the revenue model look at evidence from a variety of sources, including:
- testimonials from pilot and beta customers
- JDAs ( joint development agreements)
- LOIs (letters of intent)
- NRE (non-recurring engineering)
It also important to look at the company’s comparables — seeing what types of exits similar companies have made may help predict how this company will do in the future. If the business model is the foundation upon which the company is built, the revenue model is the structural beam.
While there are many aspects to assessing a startup’s business model, looking into these three areas will give you a solid platform from which to build out your research. Propel(x) endeavors to make the due diligence process easier for investors; you can submit a questions related to business models to any of the companies on our platform.
