Investing in startups is a high-risk, high-reward strategy. Get it right, and it can pay off massively, as even a relatively small initial stake can multiply incredibly quickly. Indeed, many investors dream of picking the perfect startup and watching their investment grow exponentially as the brand builds itself up from humble beginnings.
Unfortunately, up to 90% of startups fail. So, statistically speaking, your chances of picking a winner aren’t particularly high. Luckily, there are methods to push the odds in your favor and hone in on the likeliest startups to succeed. In this guide, we’ll explore exactly how it’s done, with a list of key characteristics of high-potential startups, and some red flags to watch for.
Key Features of High Potential Startups
Seasoned, successful investors know how to spot startups that are likely to succeed from those that are almost doomed to fail. They do this by looking at all aspects of a startup, from the characteristics of its founding team to the products or services it plans to offer. They dig into the data, looking at profit projections, the level of competition in the market, and beyond.
Here are some of the key features that high-potential startups tend to exhibit:
Problem-Solving Products and Services
Ultimately, the success – or failure – of companies comes down to their offerings. The products and/or services they provide need to be able to generate sufficient interest to build the brand up and help it grow, especially in competitive industries like retail, hospitality, and software as a service.
The best startups tend to produce products/services that solve problems or fill gaps in the market. Their offerings should be helpful and valuable, addressing notable pain points. Investors can conduct market research and listen to startup sales pitches to ascertain which products have the best odds of success.
Innovative, Out-of-the-Box Ideas
Many markets are highly saturated and competitive nowadays, with hundreds, if not thousands of brands all vying for the same audience and offering very similar products or services. To stand out in these situations, startups need to feel fresh and innovative.
They need to be extraordinary, with unique offerings that give them an edge over their competitors. When reviewing a startup’s proposition, investors should look at existing similar companies to see how innovative or iterative the startup really is, focusing on brands that think outside the box.
An Experienced and Hard-Working Founding Team
The long-term success of startups depends largely on the people driving them. Startups inevitably face challenges, particularly in their first year of operation, and that’s when you will see the best owners step up and face those obstacles head-on, while others buckle or crack under the pressure.
For this reason, investors should learn as much as they can about the founders and initial teams of startups. Look for people who are experienced, ambitious, determined, and capable of weathering the hard times, rather than those who are expecting an easy ride to fame and fortune.
A Clear Business Plan With Realistic Goals
Every business needs a business plan. It’s one of the first tasks of a business owner – to write up their plan, set clear objectives, share the results of their market research, and establish how they intend to turn their initial idea into a viable and successful reality.
Investors should review business plans in great detail, using the benefits of their experience and business expertise to assess them. Good plans should be clear, thorough, and, most importantly, realistic, backed up by hard data, rather than hope or optimism.
Signs of Traction
Traction basically refers to progress or movement of some kind on the business front, as when a company starts making sales and gaining customers. It’s a hugely important factor in determining high-potential startups, as it’s a clear indicator that the business can actually make money.
If you can see some sort of traction, which might be revenue, pre-orders, user growth, or established brands reaching out to propose partnerships or collaboration, it could suggest a relatively safe investment. Conversely, startups with low or zero traction still have a lot to prove.
A Market That Is Not Overly Saturated or Competitive
You also need to assess the market or niche in which the startup plans to operate. As touched on earlier, many markets are quite saturated now, which means high levels of competition exist. As markets becomes more competitive, new, emerging brands find it hardto get noticed and succeed.
That doesn’t mean you should never invest in startups in saturated markets, but they need to bring something truly unique to the table. It’s also a smart strategy to look for brands operating in fields that are starting to gain prominence or don’t have the most intense levels of competition.
Plenty of Room to Grow
When investing in any company, especially a startup, you have to think several steps ahead. Your investment will not grow or multiply overnight. It’s a gradual process, and it can take years for even high-quality startups to fulfill their potential and become genuine success stories.
Because of this, investors should not just look at what is happening now or the near future when assessing startups. They should think far ahead, looking at how scalable the startup is, how much it could diversify its products in the future to reach a bigger audience, and how much room it truly has to grow.
Warning Signs to Watch Out For
As well as being able to recognize the common characteristics of high-potential startups, it’s also important for investors to see the so-called red flags of risky investments. Startups that are likely to fail tend to show warning signs early on, and if you can spot those, you’ll be able to avoid putting money in low-potential ventures.
These warning signs include:
Unrealistic Projections
As touched on earlier, it’s vital for startup founders to be realistic. While many may dream of overnight success, they have to be willing to face the reality of startup growth and development, which is often slow and comes with many challenges in the early stages.
Their forecasts and projections should match this. They should be realistic and grounded in data. If a startup business plan involves instant or exaggerated claims of prospective success, it may reflect a lack of awareness on the part of the founding team.
A Lack of Clarity or Market Understanding
As well as being realistic, startup business plans need to be clear, demonstrating the founder’s knowledge and understanding of their market, audience, and competition.
This is why reading the business plan is such an important part of assessing a potential investment. Quality startups should be clear and, thorough in their plans, reinforced by extensive research and analysis.
Low Levels of Traction
Low levels of traction don’t necessarily mean that a startup will fail. It might just be the case that the startup is still brand new and hasn’t yet put its full marketing and branding plans in place.
However, it’s a simple fact that some traction is better than no traction. If a startup isn’t yet making sales, gaining users, or generating much interest, it may be best to bide your time, see if and how traction develops, and then reconsider your investment.
Legal or Ethical Doubts
Some startups may have great plans, strong founders, and other pillars in place for success. Yet their success may still be thwarted due to legal challenges against their products or practices, or ethical dilemmas surrounding their operations.
If you doubt the legality or ethical nature of a business, it’s often best to avoid it, unless the founders provide clear guarantees that resolve your concerns.
Lack of Leadership
The best businesses always have strong leadership groups to guide them and make the big decisions in both the good times and bad.
Conversely, a lot of startups end up failing because of a lack of leadership or authority at the highest levels. It can cause poor morale, a lack of team cohesion, or simply a failure of the company to fulfill its promises. If a startup team seems to lack a clear leading focal point, that could be a concern.
Assess Startups Thoroughly to Make the Safest, Smartest Investments
So, if you’re planning to invest in one or more startups, the key is simple – do your research. The more you learn about the startup, the more information you’ll have to inform your decision. Look at business plans, projections, market research, and many other relevant data points to get a full picture of the small business, and then decide if it’s right to invest in. It will always be a risk, to some extent, as even the best and most high-potential startups can still fail due to unpredictable market conditions or unexpected obstacles. But, if you can learn to identify the most high-potential startups, you’ll have a much better chance of keeping your investment risk low.
