Measuring the Immeasurable: Evaluating Startups Qualitatively
At Hyde Park Angels, we evaluate startups based on quantifiable metrics related to traction, market size, and more. But that’s not all we consider. In fact, sometimes the most important factors in determining whether we should invest are qualitative. While these can vary from deal to deal, there are a few that remain the same.
Understanding of the Pain Point
Do the entrepreneurs engineering the solution fully understand their audience and their audience’s pain point? Can they provide defendable evidence that this is a legitimate pain in the market? And, can they demonstrate that their audience has the decision-making power to find or implement solutions?
Naturally, entrepreneurs can use metrics to try to tackle these questions – anything from the size of the market affected, the dollar amount of losses caused by the pain, and even the numeric figure of the audience’s purchasing power. However, they still have to be able to clearly identify the right pain in the market and articulate it in a way that is convincing to multiple stakeholders and investors.
Value Creation
This goes hand-in-hand with understanding the pain point because value creation hinges on a keen understanding of the target audience. It also stems from the knowledge that this startup’s solution can address and alleviate the pain so effectively that it changes behavior. Qualitative examples can illustrate this point, along with metrics that already quantify a behavior change. Again, however, the entrepreneur’s ability to communicate the value for the stakeholders stands apart from being able to take others through the numbers.
Quality of the Solution
When investors actually evaluate the solution by testing it out, they aren’t just looking to see whether the solution works. It should work, even if it’s still at an early stage. If it doesn’t work, you’re probably not getting an investment. The trickier, more nuanced question is how well the solution – whether its software, a physical good, or otherwise – works.
Different investors are going to come up with different answers, but ultimately entrepreneurs should be able to convey why for that particular audience is this solution a quality one. Not every business needs to engineer an extremely complicated, labor-intensive technology. Some do, of course, but it always, always goes back to that target market.
Team Experience and Existing Relationships
Can the team, including the management, board, and existing investors, bring this company to the next stage? This can be a subjective question, but also a crucial one. The leadership needs to have a clear direction and a means of articulating that direction convincingly, in addition to experience and understanding of the space they are trying to disrupt. Likewise, the existing investors (if there are any) need to add value with their relationships, networks, industry expertise and experience, and significant capital.
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This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.