There is a direct correlation between an investor understanding the 5 basis principals of considering making an investment and an entrepreneur receiving the correct types and amount of funding to launch their startup. Therefore, for both funders and founders, focus on these 5 M’s in evaluating any successful entrepreneurial investment: (1) Management, (2) Momentum, (3) Model, (4) Motivation and (5) Market. As an active angel investor, Dr. Silvia Mah, founder of She Invests, a firm focused on giving a voice to female angel investors through a podcast, a snackable book, and investor circle opportunities to grow the number of active angel investors globally, knows intricately that these 4M’s are revisited by every angel group, syndication network, and angel conference in analyzing startups for investment.
(1) Management (the team)
The passion of the startup individual or team is contagious when it is genuinely communicated and embraced by all involved. Is the founder / founder team experienced enough to take this startup towards creating value inside the company (culture) as well as execute on product deliverable? Is the founder coachable? Do they have the right board of advisors (scientific, technical or industry board) who have validated the startup potential and gotten in back of the mission? How credible is the startup team? Do you trust them with effectively using your investment dollars well? How experienced are they in the industry they are going into? How experienced are they in creating startups? One huge consideration and one that really makes the “female founder – female funder” connection really thrive, is the personality match between the entrepreneur and investor. They will be spending many hours and years together, so that that connectivity is crucial for a successful return on investment. The tenacity/grit of startup founders has been a deciding factor in some investment decisions.
(2) Momentum (traction)
The type of traction a startup can garner from their immediate startup ecosystem supporting their endeavors, advisors connecting them to great collaborators, and just a non-stop attitude is what investors want to see. Many entrepreneurs ask how do they show traction at early stages of launching their startup. Simple traction of presenting at conferences, meeting with angel investors (even over coffee), pitching at startup events, or customer interviews are great ways to show you are on the right track. However, the number one way that you can show traction is actually getting paid customers, the speed of early adoption by your target customers is crucial to your continued growth of happy customers.
(3) Model (show me the money)
Model is as simple as the business model. The startup needs to be able to communicate the way it thinks it can make money, through BtoC, BtoB, franchising, licensing, etc. There are so many ways to build a business model, but those startups who are successful really understand the intricacies of their industry and innovate around how they can make sustaining revenues for the highest return of their stakeholders. A prime example of investing in a startup primarily because of the business model is one that understands how to create value and revenue at a very early stage to be able to fund the larger vision. This shows business acumen in the industry, value of the investors’ money and returns, and an astute business model innovation.
(4) Motivation (why now?)
For a product to penetrate a market, a certain market factor needs to drive a large component of the business model. The market driver might be that the technology is ripe enough in the industry to support a new way of delivering a certain product (Spotify) or that the customers are ripe for a new solution in the growing sharing economy (Airbnb). There is an urgency to capture the increased interest or leverage certain new technology to launch & receive funding for a new venture. Another consideration under “motivation” is the team-product fit. Why is this team best suited for producing this product and executing a flawless business model for optimal proof of concept validation (and actually having a startup survive)? If the product is so suited for the team as well as the market, does it have enough IP (Intellectual Property) protection to ensure long-term success?
(5) Market (are there enough customers to buy?)
There are two approaches to help define the market: Top down and Bottoms up. Top down takes a macro-economic view of how large the market is, competitors, and current market trends. Bottoms up takes the customer view of how many items will be sold to how many people while not taking too much notice on the larger drivers in the industry. The product-market fit is crucial in the successful launch of startup, connecting the passion-driven development of an impactful product with a market who is hungry for the solution. A typical VC would only look at Market of >>$500M, growth rate of >>10%, large pain point among customers (in numbers/size of customers and value to the end-user), and unique approach to solving pain.
Investing in startups is a high-risk proposition. These simple 5 M’s help demystify the most important aspects to consider and at least start the due diligence process with a business seeking funding. For entrepreneurs, being able to clearly articulate the unique the 5M’s to an investor will get to the next meeting, which is the only goal you should have when speaking with potential investors. It’s a delicate dance founders and funders take in increasing trust between them through genuine conversations, breaking down market drivers and investigating how unique the product is for the customer who is in desperate need of a solution.
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