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Evaluation of startups: insights from a VC investment manager

Evaluation of startups: insights from a VC investment manager

31 Jan 2020

Hello, everyone! My name is Yury Shlaganov, and I am an investment manager of the venture fund. If you are reading this article, then you might have already seen my public evaluations of several companies on the Rocket DAO platform (if not, you can see them here and here). We have decided that it would be interesting and useful to review the process of project evaluation in detail, it will definitely help both new teams and platform’s users. New teams will be able to prepare better and to get higher scores in the end, platform’s users, in turn, will trust the results more. Let’s get started.

Startup Jedi

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Rocket DAO’s public evaluations are based on simultaneously a simple and comprehensive mechanism. A project team completes the questionnaire which then goes through the scoring. The most promising projects get straight to me and to other experts who are also representatives of venture funds (by the way, Rocket DAO is now looking for VC analysts to conduct evaluations, so if you are interested in joining us, feel free to contact). We thoroughly analyze companies, fill out assessment forms and comment on every parameter. The result of the process is a company’s evaluation profile (as the ones cited above).

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Let’s focus on the final stage — the project’s evaluation, because it is setting the scene and mainly determines the impression of the project. In general, the entire process of the project evaluation on the platform can be divided into 4 steps:

1. Basic consideration of the idea: wheather it has a common sense or not

The Rocket DAO team has an excellent screening system, therefore this step is purely basic. We are checking whether the project should be evaluated in detail. In my opinion, in the early stages, the scope of the project is more important than its idea, hence, firstly, I try to define the maximum possible potential market area. If I fail to find a sufficiently large market (at least a related market, a part of which the startup can become), so then the evaluation does not make sense, just as is the case with obviously stronger competitors and a precise strategy of differentiation.

2. Communication with the team

In the early stages of the project development the team is paramount, so I have to communicate with its key members at least ones. I try to understand, how much they are involved and whether they see it clear how to evolve further. The scale of ambition is essential, because one of the main failures for investors is the company’s founder, who ceases after being offered to sell a company for a few millions or tens of millions. I also discuss the project’s bottlenecks and the measures, that can minimize them. For example, while working with the Caer Sidi team, we have focused on the nuances of the business model and the geographical expansion. However while cooperating with the Gamepad team, we have devoted more time to the product itself and to the Telegram limitations as a basic platform.

Click the image to see the results of the evaluation

3. A thorough and comprehensive review of the main project parts

Which are the following ones:

Problem and product: does the product give value? To check this, firstly, I analyze current methods of the solution to the problem, trends, and frequency of the search queries. Thus, I see whether potential customers have declared problems in real and how acute they are for them. For example, in the case of Caer Sidi, medium and small gaming studios have limited access to an additional source of monetization and they also need to increase the loyalty of players. In my opinion, these facts appear to be an acute problem for potential customers. So the product, developed by the team, effectively solves this problem.

Market and competition: is the opportunity big enough and how difficult is it to get a significant share? The issue is important because we consider startups — the companies which are supposed to have virtually unlimited capacity to scale. To create such a company is possible only if the size of Total Addressable Market (TAM) exceeds $1 billion per year. The target market may be considered in two ways: top-down (it is based on industry reports and on segmentation of market sizes) and bottom-up (it is based on the number of potential clients and hypotheses of the average check and purchase frequency). It is better to discuss both ways and then to compare results.

However, it is not enough just to have a large pie, it is also necessary to have a wide mouth and sharp teeth in order to bite off a significant part of the pie. And consequently, I move on to the analysis of competition and competitive advantages. I compare the offered product with the existing solutions and try to answer the question whether this product is more effective than other solutions to the problem and how difficult it is to copy this product. Let’s return to Caer Sidi: the company’s solution has serious advantages over existing analogs (which are not so many, by the way), but its technological part may be quite simply copied. It means that once the market entry is completed, the team must make every effort to capture a significant market share until the first serious direct competitors appear.

Business model: does a business model allow you to get maximum financial efficiency and how easy is it to scale? At the early stages of development, companies begin thinking through various options and each of them can be checked for adequacy. For example, if a team sells b2c software in our SaaS era and simultaneously plans to base its business model on the selling of lifetime licenses, so this company does not understand the market properly and it is unlikely to come out ahead (though sometimes there are exceptions).

Click the image to see the results of the evaluation

Team: are these people able to establish a thriving business? I analyze the key members’ experience and the results of our face-to-face communication. It might be good for the company to be staffed by diverse specialists which provide industry expertise and cover all the main competencies required for the start-up: development, marketing and sales as well as administrative and management competencies.

4. The formation of a holistic view

Eventually, I try to draw a global picture, to identify the project’s strengths and weaknesses and to see to what extent the first ones can give a competitive advantage and how fatal the second ones are.

As you see, this is the whole process of evaluating companies on the Rocket DAO platform. Let me give you a little hint about filling in the forms: do not ignore the completeness of the information. The evaluation on the platform still differs from the evaluation process for the fund portfolio. It is more time-bound and simplified. For this reason, the larger the range of questions (at least, listed above) you will cover, the better the chance of getting a higher rating you will get.

Good luck and venture to everyone!

31 Jan 2020

 

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