Every business requires an investment and business owners expect a return on their investments. There sure is an internal reward from the excitement of building something out of nothing, however, at the end of the day, wise entrepreneurs will always factor in the expected outcome of their investment and the potential of the product or service they’re investing to create.
In the technology space, the two biggest expenses required as an initial investment are in product (app) development and marketing. However, unlike small businesses, even the most successful technology startups will rarely quickly generate revenue to cover operating expenses meaning that entrepreneurs must also have funds to run the venture for at least one year. In today’s competitive funding environment, it’s no longer enough to attract investors with just an idea and even a few customers. Founders must be prepared to last.
Whether your startup idea is worth the investment depends on many variables. The idea itself plays a big role. Here are what I found to be the three most important factors that will help you better predict the future of your idea based on your available investment resources.
1. The Business Model
Your startup business model is how you deliver your value proposition and make money. The resources required to launch and operate a startup depend significantly on the validated business model. For example, nowadays, it is a lot cheaper to start an e-commerce business than build a financial technology (FinTech) startup. The cost of starting a content site like an online magazine is lower than the investment needed to build a social network.
On demand, virtual goods, auction, software as a service, peer to peer, membership and HealthTech startups vary in many ways, especially the human and financial capital required to start and operate the business.
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As discussed in the third point below, the decision of the entrepreneur to invest in a startup idea should first consider their personal expected outcome from the business. No matter the business model and investments required, everyone will suddenly want to contribute to a promising venture if there are tangible signs of success.
In other words, even if entrepreneurs don’t have the needed personal funds to start and operate a startup with a business model that needs a lot of cash, they should still execute as long as they have enough funds to reach certain levels of validation. However, if the goal is to run a self-funded business that can quickly generate revenue and become self-sustainable, the business model should be on top of the startup idea evaluation list.
2. The Industry
The three things founders must consider in their decision to invest in their startup ideas with regards to the industry are competition, laws and their industry knowledge. In a highly competitive industry, while founders may not have control over competitors’ actions, the end user will expect a significantly better solution to justify the switching cost to use their product instead.
Business models like FinTech and HealthTech tend to have more regulatory requirements as compared to other models. This adds another layer of expenses that should be accounted for in the initial investment. For entrepreneurs who have never worked or operated a business in a highly competitive and regulated space, the road to meeting their expected outcome is going to be extra challenging and will require significantly more resources.
3. The Resources
The four things founders must consider in their decision to invest in launching their ideas with regards to resources are cash, time, background (expertise) and team. An incomplete product even if it cost half a million dollars doesn’t add any value to the user unless completed and adjusted to reflect their feedback.
Nowadays, there are many ways founders can release smaller versions of the app in order to quickly validate key hypotheses and build the next versions with higher predictability. While those smaller versions will vary based on the business model, founders who don’t follow this lean approach add another layer of startup risk. Additionally, the lean approach makes it feasible to start with a smaller budget since founders can divide the total investment to build progressively instead of spending it all in a product with many features that may or may not address user needs.
Data collected and analyzed by First Round capital shows that entrepreneurs with a technical background perform 230% better than non-technical founders building enterprise products. However, the difference between the two backgrounds is not significant when it comes to consumer products. This goes back to the importance of considering the business model and target user in the evaluation of the investment in a startup idea. Furthermore, the same company showed that teams with more than one founder outperform solo founders by 163%.
Is your startup idea worth your investment? Now you have three evaluation criteria that will help you make a wise investment decision. The market is filled with business opportunities. Be honest with yourself about the expected return from your startup and keep in mind that no matter the business, success is for those who last. At the end of the days, overnight success can take up to 10 years.