Want to be part of the 10X club? Here is what to look for when investing in startups

By Maria Halasz (pictured), CEO & Co-Founder of Stride Equity.

Warren Buffett has many famous quotes, amongst them one of the most recited is “be fearful when others are greedy and be greedy when others are fearful”. If he is right, then this is the time to invest. With company valuations down by up to 50% from 2021 levels and most investors’ hands firmly in their pockets, really good deals are to be had.

Crowdfunding platforms offer unique access to these companies, so if you have part of your portfolio allocated to venture investments, this is the time to join the 10X club through investing in one or more of these. However, it is worthwhile to make sure you do your research and invest with the smart money. Let me share my top five tips for budding venture investors.

1. Look for inspiring founders with experience and grit

The success of an emerging company lies almost entirely in its founders. Look for founders who have a deep understanding of their industries, their customers, and a successful track record or valuable lessons learnt through failed ventures. You want to be confident that the founders know their technology, product or service and have a deep understanding of their market and underlying business model.

My friend and co-founder of Stride Equity, Jon Brett, uses the story of having to listen to a pitch about a taxi app from three young men in suits with perfectly manicured nails and fresh hairdos. Jon asked them if they have ever driven a cab and the answer was, of course, no. You can see where this is going.

Besides experience, you want to see if the founders of the business have the stamina to get through the inevitable tough times. Look at how they got to this stage, and how they handled difficult situations. What motivates them and how far do they want to go?

Another thing to consider about founders is that historically solo founders have been less successful than partnerships. Even so, don’t discount a highly-motivated founder who’s surrounded him or herself with a capable, experienced team.

2. Invest in a unique and defendable product, service or technology that solves a real problem

The most successful products, services or technologies solve real world problems, preferably universal ones. Sometimes the problem is not apparent to us, and the founder with a solution seems like a true genius (think of Afterpay). On the other side of the coin, the best products or technologies will fail if you have to look for a problem to solve when marketing them.

If the business is not yet in profit (even more so if it is a pre-revenue company) the product, technology or service must be proprietary, highly defendable, and ideally a first mover. This could be a patent, trademark or ‘black-box’ technology undisclosed to the market, hence not replicable.

3. Market validation
   

At Stride we look for startups or scaleups with a unique value proposition that, at the very least, have early market validation. This could be a growing customer base, positive market feed-back through customer reviews and followers.

Even better if there are a combination of factors which prove market traction such as early-revenue, commercial contracts with reputable partners, option to license agreements, pilot programs with positive results, engagement with relevant groups or communities, strategic funding from potential commercial partners, or competitive grant funding from government.

These are all strong indicators that people with specific technical and business related skills have reviewed the company and deemed it to be a credible player in the relevant market.

4. Scalability
   

Many companies focus on local issues and problems that are not easily extrapolated to other geographic regions or markets. They may be very good businesses that solve real problems, but their growth and scalability will always be limited.

Any potential venture investment should be able to prove its potential to reach a significant scale, and the faster the better. This doesn’t necessarily mean it has to have global potential – big businesses can certainly be built within smaller markets – but it definitely helps if the company’s unique value proposition has universal appeal.

5. Alignment with experienced investors

Especially if you’re new to investing, aligning yourself with experienced investors who are likely to be able to assess a company better, is the smartest way to go. When looking at a crowdfunding investment opportunity, it is helpful to know who else is investing. A co-investing venture fund, strategic partner and investment from professionals working in the industry should all give you confidence.

At Stride Equity we use our founders’ collective 100 plus years experience in investing and operating businesses to select those companies we can confidently put our money into. We look at the founders, what problem they are solving and will they have the ability to scale to build a substantial business. We host these highly vetted companies on the Stride Equity crowdfunding platform where we also co-invest.

Almost goes without saying that companies that damage the environment, treat their people poorly or have inadequate governance are out. Strong governance, sound environmental and social policies are critical for the success of any business in the long term.

So, crowdfunding has come a long way from its early roots in music and the creative arts scene. Today, it is a growing industry with several platforms that host promising emerging businesses. Do yourself a favour and check out some of the opportunities presented. Now is the time for motivated investors to access high-quality venture investments through crowdfunding.