How do investors evaluate startups? Part 2.
I provide consultation for startups.
The most frequently asked question by startups that want to get a fund is: Are we ready for investment or not, and what should we do to be ready for investment?
That's why I decided to make a group of posts that if you remember them well, will greatly improve your readiness for investment.
Each post will talk about one of the factors that make a difference in your readiness for investment and in the investor's evaluation of your startup.
The factors that we will talk about in these posts are:
- Team
- Market Size
- Comparable startups
- Competitive Edge
- Defensibility
- Technology
- Product/Market Fit
- Traction
- Cap Table
- Required Documents
Today in this post we will talk about the first two factors
which are the Team and the Market Size
The first factor is
[the Team]
What does the investor look for in the team?
The best thing of all is that you have done exits before, and of course this applies to 5, but in Egypt, the example here is the cofounders of SWVL. Ahmed Nouh worked as a capiter and took 30 million dollars, and Ahmed Sabbah worked as a tilda and took 5 million dollars in pre-seed. The next best thing is to be in a senior position in well-funded startups, and the examples here are very many, and these startups that control the ecosystem in Egypt are the most famous example at the moment This is Rabbit, the CEO who was in Uber and Talabat. Here we have to say advice: Sometimes the right decision is not to start a startup, and it is better to work with a well-funded startup. The first is not to get a fund easily, no, it is to make a mistake and learn enough to be able to run a startup. The third best thing is to have a lot of experience in the industry in which you are going to start your startup. If you are not among the groups, The three above, so you don't have a chance to get funded? The short answer: No, you definitely still have a chance. The long answer: The groups above this will be easier if they take a fund, not because of relationships, but because of their experience, and this reduces the risk that the investor takes, and the most important thing for the investor is de-risking, and all the factors that we will talk about will ultimately result in reducing the risk in one way or another. If you do not have an advantage over the above countries, either create it first and then start a startup Or you start a startup and your journey will be a little more difficult and you are looking for how to do de-risking in other ways such as results and growth and the rest of the things that we will talk about in the rest of the posts. Some tips regarding the team to increase your readiness for investment: - The ideal number of founding teams is from 2 to 3 because some investors do not prefer the solo founder, and more than 3, the ratios with each one will be Few and with the dilution that happens with each round, they will find their percentage has become weak and this is worrying for the investor for fear that they will leave the startup
- The integration of the team in the roles also makes a difference, meaning that if there are 3 of you, the best thing is that one has worked in startups before and is responsible for the business, one is an expert in the industry you will work in, and one is technical... This is the ideal situation
- The presence of advisors is very important and the more important the names are, the more material will improve your readiness for investment
The second factor we will talk about is
[The Market]
One of the most important factors that the investor evaluates is the market size
We always hear that the market size must be large
But how do we calculate the market size? And when do we say that it is large enough?
And why does it have to be large in the first place?
We say that the market size is large when it is a billion dollars or more.
Simply put, the market size or the total annual revenues achieved by this market are more than a billion dollars.
For example:
If you type in Google [food delivery market size]
The first result that will appear will tell you that the global market size in 2020 was 80 billion dollars and that it is expected to reach 128 billion dollars in 2027.
How do you calculate the market size for your startup?
Before we explain the methods used to calculate the market size
There are 3 terms that you need to know, which are TAM, SAM, and SOM
First thing:
TAM is Total addressable market
And simply, this is the total annual revenues that you will achieve if you take 100% market share from the market you are in
(And this is of course impossible to happen in reality)
Or we can say that it is the largest annual revenues that you can reach in the life of your startup
Meaning that after expansions, whether geographically or by expanding your sources of income.. Let's see after the maximum limit of these expansions, if you take 100 Market share, how much annual revenue will you achieve?
Do you calculate TAM on the Global Market, MENA Market, MEA Market, or Local Market??
There is no specific answer and each case may have different advice.
But if you are in the early stage, calculate it on the MENA Market. If your expansion plans are to expand to the MENA Region, if your plan is to remain in Egypt, then calculate it on the Egyptian market.
But there is no specific rule and most people do it on the Global Market.
How do we calculate the TAM?
We have 4 methods that we use in our work with startups. I will not explain them, but I will write them. If anyone wants to ask about something, send me the top-down approach, bottom-up approach, Value theory, and Research Companies. Or I will be the one who makes you the Pitch Deck, so don’t worry. As we said, the good number is that it will be more than a billion dollars. The second thing: The SAM is the Serviceable Available Market, and this is the amount of annual revenues that you can estimate You actually reach it, meaning if you set the TAM on the Global Market and your best plan is to expand into the GCC, then the SAM will be calculated on the GCC, and if the TAM includes segments, you will not target them either, and you will not count them with the SAM as well.