Three Ways to Pick a Profitable Start-up

By Wayne Mulligan, on Thursday, January 12, 2017

When evaluating a start-up for a potential investment, you might be tempted to focus on the company’s product, or its competition.

And certainly, those are important factors to consider.

But as we’ve learned over the years, other factors are far more likely to influence the company’s outcome—and in turn, influence the success of your investment.

So today, I’ll reveal three indicators we look at when evaluating a start-up.

These indicators have been statistically proven to help predict start-up success...

And as you’ll learn, they all have one surprising thing in common.

Indicator #1 — A Founding “Team”

Well all love a good tale about a lone pioneer—someone who conquers an industry all on his own.

But the truth is, many of the most successful companies were founded by a team.

For example, Standard Oil, one of the most valuable companies in history, was built by John D. Rockefeller and his business partner, Henry Flagler.

Google was founded by Larry Page and Sergey Brin.

Even Facebook had multiple founders.

And the fact is, a number of studies back up the value of a founding team.

For instance, one study shows that companies founded by two or more people grow 3.6 times faster than companies with “solo founders.”

With multiple founders, a young company can get more done more quickly—and can help provide a profitable return to investors like you and me.

Indicator #2 — A “Balanced” Team

But it’s not enough simply to have multiple founders…

The team also needs to have the right founders.

For instance, if every founder on a team had the exact same skill set, the team wouldn’t be able to divvy up responsibilities effectively.

However, a team that’s more “balanced”—where each founder is an expert at one distinct task—stands a higher chance of success.

Take Facebook as an example…

Mark Zuckerberg was the technologist and visionary behind the company. But Sean Parker, his founding President, had real business experience. Parker had started and run multiple tech companies in the past, including Napster and Plaxo.

So at Facebook, Zuckerberg focused on the vision and the technology…

And Parker focused on raising millions of dollars from investors, and building out the company’s team and operations.

This “balanced team” approach was critical to Facebook’s eventual success.

And again, there’s statistical evidence to back up what I’m telling you:

Studies have shown, for example, that balanced teams raise 30% more money and generate 2.9 times more user-growth as compared to unbalanced teams.

Indicator #3 — “Domain Experience”

There’s also another critical indicator to look at when evaluating a start-up’s team. It’s something we call “domain experience.”

In other words, does this team have significant experience in the industry (the domain) in which it’s operating?

For example, before starting Standard Oil, John D. Rockefeller had worked in the oil industry for years.

And as I mentioned earlier, before arriving at Facebook, Sean Parker had run multiple tech start-ups.

And once again, research backs this up:

Research shows that founders with significant industry experience are far more likely to succeed than their counterparts without experience.

The Secret Ingredient Behind Many Successful Start-ups

As you may have already noticed, each one of these indicators has something important in common: people.

People are the key ingredient to a successful start-up—even more important than a start-up’s product or competition.

One reason for this is simple to understand:

When companies are just getting off the ground, things will be changing constantly. To stay alive and thrive, a start-up often needs to re-imagine its product, or attack a different market. To use some industry jargon, it needs to “pivot.”

But throughout all the pivoting, there is one constant: the team.

That’s why we believe these three indicators have been statistically proven to correlate to start-up success—and to investor success.

So when you’re looking for new start-ups to invest in, be sure to use these indicators!

Happy investing.

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

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Tags: Early-stage Investing Start-ups

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