5 things investors check to identify winning companies

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Success metrics are broadly defined, especially in the area of private investments. Standards of measure for each opportunity are inherently different, and primary data is almost impossible to come by. But this doesn’t mean we can’t apply a sound approach toward assessing a company.

At Fundnel, we evaluate each fundraising company with quantitative metrics collected firsthand from the applicants. Then, we apply relative scoring to identify outstanding performers.

These are the five primary scoring categories we feel are crucial to assessing a company’s potential.

1. Financial and operating performance

Financial data such as revenue, EBITDA, and net profit give clear signals for the following:

• Can the company support its current burn rate (if net profit is less than zero)?
• How much time do they have before they need another round of capital injection?
• Are the marketing, customer acquisition, and R&D costs sustainable?
• Is there a market for the company’s product or solution?
• Is the market willing to pay a higher price for the product or solution?
• Is the company being run properly?

For early-stage companies, we attribute a lighter weight on financial performance, as many of them have usually not started generating revenues. However, we look at a company’s financial performance when it has managed to secure paying customers or revenue in the early stages. This is a proxy for market validation. Many companies can acquire users when the service/product is free, but when a customer starts paying for it, it speaks volumes of the value that the service/product brings.

The kind of operating metrics or traction required for success differs between B2C and B2B businesses. A B2C business will require some form of explosive user adoption to showcase local market acceptance as a starting point. A B2B business, on the other hand, could do just fine with a couple of large forward contracts which secure the revenue pipeline for a certain time.

We also look at the number of users and/or clients as a measure of product success. The growth trajectory and recurring revenues are important factors as well. Users can be incentivized to use a product, but what we are looking for is a user habit that can be monetized.

2. Management background

The importance of the founding team cannot be understated, and this is especially true of early-stage companies, where quantitative performance metrics are hard to come by. This is where the relevant experience and team structure become significant data points in predicting a company’s success. We look at the team members’ working experiences vis-a-vis their roles and the problems they are trying to solve in their company.

When running a startup or growth company, some challenges are sector-specific (e.g. intellectual property, client networks, technical expertise, etc.), while others are generic (e.g. people management, business process, project management, etc.). Relevant industry experiences help address sector-specific challenges, while having an extensive working experience overall helps solve generic challenges with speed and maturity.

3. Industry performance

The prospects of an industry will inevitably impact a company’s potential, that’s why investors look into a company’s industry. Is it a sunrise or sunset industry? What is the current size of the market, and what factors will cause it to shrink or grow? Is it affected by external forces such as regulatory policies? How susceptible is it to disruption?

But we focus more on the addressable market and validate it vis-a-vis the segment that the company is serving, their market share, and the competitive landscape. We evaluate industries based on the current investor sentiments. We collect this data from investors’ interests on our platform and through our conversations with key investor groups (i.e. private equity, venture capital, corporate funds, angel investors, etc.).

4. Product and brand

A strong offering is often the first point of interaction between the company and its customers, and a manifestation of good planning and customer acquisition efforts. So, investors look at a product’s defensibility:

5. Deal and exit potential