Investing in startups is like searching for gold: only a few in a thousand out there will become real treasures. But how can you tell which project is worth your money and attention?

How can you evaluate a startup in advance?

A successful startup creates a product that the market needs

Most startups fail because they create a product that nobody wants. Professionals call this a lack of product-market fit, i.e. a mismatch between the product and market needs.

Many founders fall in love with their idea. They spend months or even years developing a functional product, investing time, money, and energy, but forget to check one key thing: Is there a demand for it?

So, how can you tell if the market truly wants a product? In the early stages, you do this through conversations with potential users. Conversations, not online surveys or polls. Founders have to leave the office to find out:

• How are you currently solving this problem?
• How much time and money does it take?
• What annoys you most about the process?
• Would you be willing to pay for a different solution?

Verifying by MVP

A minimum viable product (MVP) is a prototype that enables you to test a hypothesis. Startups often fall into the trap of spending resources on building a polished product right away. Instead, it is better to quickly create a basic version to test with real users in the field.

A prototype is considered successful if:

• People are willing to pay for it, even before it is complete.
• Users customise the product for their purposes.
• ‘Word of mouth’ emerges.

The right business model is also important: how a startup earns and grows

Even the best-quality product will not make a startup successful without proper monetisation. That's why the business model is at the heart of a growth strategy, allowing you to earn and increase profits.

How can you tell if the model is right?

• Real payments validate the product's viability.
• Working Unit Economics. Customer acquisition cost (CAC) should be lower than customer lifetime value (LTV). The optimal LTV to CAC ratio is 3:1.
• Scalability: The model enables you to serve more customers without costs increasing exponentially.
• Transparency: Customers understand what they are paying for and recognise the value.

Mistakes to avoid:

• ‘We haven't thought about the business yet.’ This approach is only possible in exceptional cases.
• An overly complex model. Users won't pay if they don't understand how much or how.
• Dependence on a single customer. If 80% of revenue comes from one customer, it's not a business model, it's a contract.

A winning team

As is often said in the venture world, 'Invest in the team, not the idea.' But why is the team more important? Because ideas, the market and the business environment are constantly changing, while the team is the only stable factor in an otherwise turbulent investment landscape.

A strong team embodies experience, flexibility, resilience, and the ability to learn quickly. It knows how to listen to the market, recognise mistakes and adapt.

So, what does a winning team look like?

• It has balanced competencies: A CEO with vision, strategy, and leadership skills; a CTO with technology expertise; and a CMO with promotion, marketing, and customer engagement skills. It's not good if all the co-founders are from the same field (e.g. if they are all developers).

• They must understand the market in which they operate. Without market expertise, competencies are not enough.

• Personal involvement is required, both financially and emotionally. Co-founders should not work on the startup in their spare time. The company should be their life.

• Trust and communication are essential. The team should be able to work together and overcome conflicts. Many startups fall apart because of personal misunderstandings between founders.

Finding the right balance between market need and competition

A startup needs to find its niche in a competitive environment. While an idea may be useful, if there are already dozens of established players with large budgets in the market, there is little chance of success. Conversely, a complete lack of competition often signals a lack of demand.

A market need is defined as the presence of an acute problem that customers are willing to pay to solve.

What are the signs of a true need?

• Customers are already paying for solutions, even if they are complex or inefficient.
• The concern hinders the business or person daily.
• People look for alternative solutions themselves.

Generally, competitors in the marketplace indicate that there is money, customers, and interest in the niche. However, bear in mind that:

• If the competitors are large and slow, this presents an opportunity for the startup to act more quickly.
• If the competition is too strong, the market may already be oversaturated.

How can you strike the right balance?

• Assess the depth of the issue. Ask yourself, 'Is this a must-have or a nice-to-have product?' The startup that solves the 'trouble' will lose out to the one that cures the 'pain'.
• Find a niche. Even in a saturated market, it is possible to target a specific geographical area, user group or use case. For example, although CRM systems are plentiful, there are also solutions specifically designed for freelancers, dentists, and B2B services.
• Clearly articulate your benefit. If customers can't understand it in 30 seconds, the benefit is probably too weak.
• Be prepared for change.

Regulation and legal specifics

Another critical aspect of a startup is the legal field in which it operates. Sometimes, regulatory risks prevent promising technologies from being developed. Innovations are often capable of breaking the law, which can lead to:

• Risk of fines.
• Product blocking.
• Loss of licences.
• Failure to expand into other markets.
• A toxic reputation.

Examples of regulatory impact:

Crypto/DeFi: The SEC in the US has repeatedly halted projects due to non-compliance with standards. Recall the Telegram ICO, for example. EdTech. In many countries, the use of children's data is strictly controlled by law.

How can you avoid the pitfalls?

Firstly, understand which regulatory zone you belong to. The first step is to consult a lawyer or compliance expert at the MVP stage. It doesn't have to be a large firm. The most important thing is that the specialist understands the specifics of the market.

Take global differences into account. If you are launching a product in the US, the EU, Britain, or several regions simultaneously, be aware that there may be different rules.

Include legal expertise in the team, particularly in sensitive areas such as banking, insurance and medicine. Sometimes it is enough for a start-up to have an external advisor, but at the growth stage, this expertise should be internalised.

Adapt the product and documents before launch. This will give you an advantage over competitors who will 'act later'.

Timely product release

In the venture capital environment, timing is a matter of survival. Startups often disappear because they launch a product either too early or too late; the quality of the product is irrelevant. A timely launch is one of the main factors for success.

A product launch is not only about technological readiness; it is also about market readiness, customer readiness and business readiness. Timing is everything for a startup:

• First-mover advantage.
• It reduces the cost of user acquisition and generates media and investor attention.
• It also attracts media and investor attention.
• Furthermore, it also allows for a higher tolerance of product imperfections.

Here, we will discuss two common mistakes that startups make. The first is launching too early, before the market is ready. For example, the technology may be impressive, but it is too ahead of its time.

Another problem is launching too late, when competitors have already taken over, and even the best product may simply be overlooked.

But what if you wait until the product is perfect? In reality, this could mean spending months (or even years) perfecting something that the market may not want by the time it's ready.

So, how do you determine the right time to launch? Firstly, you need a clear target audience. You know who you're creating the product for, and you already have active users. This usually means that people have a struggle, are looking for a solution, and are willing to pay for it. Furthermore, the issue is so significant that potential customers are willing to use an imperfect product.

Assessing the market and growth prospects of a startup

The market is the basis for scalability. It is not a serious business model for a startup to solve a problem for a hypothetical thousand users around the world. Venture money goes where scalability is possible by a factor of ten or more.

So, how is the market evaluated? There is a classic model.

• TAM (Total Addressable Market): the total market size if all potential customers used the product.

• SAM (Serviceable Available Market): the segment of the TAM that can realistically be reached with the available product.

• SOM (Serviceable Obtainable Market): the share of the SAM that the startup can realistically capture shortly.

For example, the TAM of online education is worth hundreds of billions of dollars globally. However, if a similar platform were to be created somewhere in Spain, the startup would need to adjust its SAM and SOM, which would be much lower.

Growth is more important than size

A young but rapidly growing market can be more attractive than a mature market that has reached a plateau. The mobile payments market is a good example of this: it looked modest back in the 2010s, but has now grown to huge proportions.

Geography matters

A startup focusing on the US has a different dynamic from one focusing on Eastern Europe. However, 'undervalued' markets often offer higher margins and less competition. The key is to correctly assess their solvency and openness to innovation.

How can risks be minimised when investing in a startup?

Investing in startups is risky but potentially lucrative. Successful venture capitalists understand that risks cannot be avoided, but they can be controlled and mitigated.

The basis of strategy is diversification

The golden rule is to invest not just in one startup, but in dozens. VCs in the early stages can invest in 150–200 companies. Even if 70% of the portfolio ‘burns up’, one or two ‘unicorns’ will cover all losses and generate a profit.

Due diligence

Don't just believe the presentation. At a minimum, you should check the team (its experience, motivation, and history), the market (its volume, dynamics and real demand), the product (does it solve a real problem? Are there MVPs and user reviews?) and the finances (is there cost control? Are the forecasts realistic?).

Invest at a stage that suits you

Pre-seed/seed: highest risk, but with high potential for growth and earnings.

Series A+: more data and less uncertainty, but more expensive to enter.

The growth stage involves stable companies with lower multiples and more predictability.

Choose the stage with the best deals available and a level of risk with which you are comfortable.

Monitor progress, but don't intervene too actively

Ask for regular updates, such as short monthly or quarterly reports. Remember to add value in the form of useful contacts or professional advice. Also, don't put pressure on the founders — they're having a hard enough time as it is.

Be prepared to lose

The risk of failure remains, so the logical approach is to hedge your bets and invest no more than 10% of your total portfolio in venture investments.

When should you exit?

In the world of venture capital, an exit is when an investor turns their stake in a start-up into real money. This can take the form of selling the company (M&A), going public (IPO) or selling a secondary stake. The main question, however, is when to do it.

Exiting too early may result in a loss of potential profits, while exiting too late may result in losses.

The decision to exit should form part of the investment strategy. Professional investors always ask themselves three questions:

• What does a typical exit look like in this industry?
• Who are the potential buyers?
• What is the time horizon: three, five or seven years?

This helps not only with predicting returns but also with building relationships with potential buyers.

How do you know when it's time for an exit?

• One way is if the company has reached peak valuation. If a startup is showing high revenue but the growth rate starts to slow down, peak valuation is approaching. Stagnation could be next.

• A buyer with strategic interest could emerge. An ideal scenario is when a major player in the industry is looking to buy a startup because its product or technology complements their own. These deals often command a premium.

• Internal dynamics within the team may have changed. Interpersonal conflicts, changing priorities, or the loss of key employees can be a sign of impending problems within a company.

• The market has reached maturity. If the industry is no longer growing quickly, competition is intensifying, and margins are shrinking, it is better to exit while there is still demand.