11 Jan 2022

Investing in Startups: Beyond Financial Statements

Statistics show that more than 300 million startups see the light of day each year. However, only around 10% of them reach maturity and stand out.

Investing in Startups: Beyond Financial Statements

Statistics show that more than 300 million startups see the light of day each year. However, only around 10% of them reach maturity and stand out.

With such a crowded marketplace, choosing which startups to invest in doesn't happen overnight. It's a complex decision to make. One that requires a thorough understanding of its performance, growth potential, and risk factors. 

But before going into more detailed discussions, we want to be honest for a second. Naturally, the goal of an investor is to profit from their investment. So usually, the main priority is to analyze the company's financial statements. Right? Of course, having a clear knowledge of expenses, assets, liabilities, and cash flow is vital. But is it enough? Should investors be interested only in metrics such as Earnings per Share? Or are other aspects just as important? 

Let’s be clear here. Yes, financial stability and profitability are crucial elements to consider. Yet, there are other parts to analyze. 

For once, it is equally essential to be sure that the startup you are investing in has found its right market fit

Now, what does finding the right market fit really means? It means the alignment of a company's product or service with the needs and preferences of its target market. Simply put, this notion indicates the company's ability to succeed in its industry and grow its customer base.

Yet, what's important to note here is that market fit is not a one-time achievement. There is no such thing as finding a soft spot and struggling to keep it. No. This is a continuous process of experimentation and iteration. Simply put, a startup must continuously evaluate its offerings to meet its target market's changing needs and preferences. 

Therefore, discovering if the startup positioned itself in front of the right audience at all times incrementally increases the chances of making a good investment.

Another important factor to consider is competition. Understanding exactly who the competitors are can provide valuable insights into the potential success of a startup.

Firstly, competition can indicate the size of the market and the growth potential. A large number of competitors can imply significant demand for the type of product or service offered. On the other hand, a lack of competition may mean the contrary. This may suggest that the market is not yet mature or that the product or service is not in high demand.

Unfortunately, when it comes to competition, things are not just black and white. Yes, a competitive market means significant demand. Still, it also means more struggle for the startup to achieve profitability and growth. On the opposite side, a startup operating in a less competitive market may have a better chance of success. 

Secondly, competition can provide insights into the strengths and weaknesses of a startup's product or service. Analyzing the competition can help investors understand the startup's unique value proposition. Doing so will let them easily figure out whether their startup has a competitive advantage or not. 

Thus, really understanding the level of market competition can allow investors to make informed decisions about the financial stability of a startup. It can help them foresee potential issues by identifying risks before they become problems.

This being said, we want to have a one-on-one with you, the investor. Protecting your investment doesn't mean only economic implications. It doesn't mean making initial due diligence for the startup you have your eyes on and take your hands off it once the transaction is done. Investing in a startup is so much more than legal and financial aspects. It's also about seeing the whole picture and understanding why the business may struggle. It's about helping it along the way. It's about not waiting for all the answers to come to you but searching for them and making things happen. Because only by really staying in the loop can you make sure that the startup you invested in succeeds. Therefore, you made the right choice by picking that exact business from the crowd.

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