One of the most important (and trickiest) factors to evaluate in startup investing is the size of the opportunity. How big can a startup become? How big is the market it sells into — and how fast is it growing?
Before investing in any startup, you need to be sure that it has the potential to return 50x-to-100x. So if you invest when a startup is worth around $10 million, there needs to be a viable path for the company to be worth at least $500 million or $1 billion in the future. And that doesn’t take dilution into account. Most startups raise multiple rounds of funding, which will lower the overall return multiple for early investors.
So the opportunity needs to be substantial in order for a company to make sense as a startup investment. Fortunately, scaling a business is easier than ever today. Between powerful software tools, low-cost cloud infrastructure, targeted digital advertising and free open source software, there is an incredible array of tools that can help businesses grow their operations today.
Those tools are a double-edged sword for investors though. They make it so easy for companies to scale that a large number of companies have the potential to grow into a $1 billion opportunity. There are hundreds (and possibly thousands) of billion-dollar industries and niches today. Which means that the question of opportunity size becomes less about the market for a company — and more about the team running it.
When you’re trying to figure out how big a startup could become or looking at the market growth, you can’t consider that data in isolation. How those factors pair with a team’s skill sets and abilities is also key. A startup could have all the market potential in the world — but without the right team to make it happen, it doesn’t have a chance. Of course, you also need to look at a company’s traction. Its rate of improvement and change. It’s the combination of all these factors that will ultimately determine the company’s fate.