Like me, you may turn on the TV and start flipping through the channels and the show Shark Tank catches your eye. How could it not? It gives you a look inside at what some well-known investors think and do when evaluating business ideas. Unfortunately, TV shows might distort reality in order to create tension and excitement. So, I decided to talk to two successful investors and find out things they look for in a business idea.

One of the investors I contacted is Mark Herschberg, Managing Director at Disruption Ventures. Mark is a highly experienced investor who has had a lot of success in the field. When I asked Mark what was one trait a business/company must have before he would consider funding, he brought up seeing some evidence of success:

"We are an early stage fund but still need to see some traction. Typically, that means some type of revenue; in some cases, it may just be usage, such as when there is a clear monetization stream that can be turned on later but in the early days the company doesn’t want the friction or even the distraction from growth. As much as the founders and investors may like an idea, may believe in the idea, and may understand the market, there is no more clear validation than having a customer spend their money on the product or service, everything else is speculative to one degree to another."

 
This touches upon many things some companies or entrepreneurs might overlook. Having a million-dollar idea with no proof, is different than having a product with tangible value, whether it’s revenue or a large/growing user base. As Herschberg said, investors want to see something that has already had some form of success because it lowers the risk. They can see that there is a market out there, and with funding and guidance, that growth can be scaled.

 
Another investor a talked to is Kirill Bensonoff, CEO at Unigma. When I asked him the same question he touched upon evaluating the people who he would be investing in: “The first thing I do is give deference to the founding team, which to me is more important than an idea.” Bensonoff brings up a vital aspect many investors look at which is, WHO am I investing in. An idea might be fantastic, but if an investor doesn’t believe or trust the person who they’d be investing in, does the quality of the idea really matter? Herschberg gave his thoughts on this balancing act:

 
“They are both important, of course. The saying in the startup world is that VC’s, “invest in people, not products.” This is true in that we know the company will pivot in ways none of us can predict. It’s also critical to know that the people at the helm can steer the startup though all the rough seas that a growing company faces. But don’t think that means you can be less than thoughtful on your idea. Even when I’m sure the model will change significantly I want to see how the founder thinks about the company. Do they understand the industry, and how their business fits into it? Do they know the margins? How did they calculate revenue per sales person? All this discussion helps me understand how they think.”

 
It seems that successful investors have the common trait of evaluating the idea and people, and how they coexist. This can lead to lack of foresight in terms of the people behind the idea not thinking ahead and constructing their company for scaling up. Herschberg talked about this common pitfall he sees when evaluating ideas and companies:

 
“So many things work at a smaller scale, but the founders don’t have a clear model prior to scaling up. Companies need to have a plan for attracting users and recognize that the first 100 customers are different than the next 10,000, or the next 100,000.”

 
This lack of planning can be a red flag as an investor. Are they founders unprepared for the challenges ahead? Evaluating the founder’s abilities is essential for deciphering between a quality investment and one that can leave an investor disappointed.
Another thing that both Bensonoff and Herschberg brought up is getting caught up in a “hot” industry, or just the “herd” mentality in general. Herschberg touched upon investors overvaluing the “hot” industry:

 
“Investors sometimes overly focus on what space is hot. Right now, it’s VR (Virtual Reality) and AI (Artificial Intelligence). Investors have a herd mentality, so when a space is hot, they want to get into it and tend to overvalue the companies in the space.”
This does not mean avoid the “hot” industry, but a diligent investor will look extra carefully to make sure they aren’t getting caught up with the buzz. Bensonoff summed it up best: “Don't worry what the "crowd" thinks.”

In conclusion, it seems that successful investors keep an eye out for some key things. First, they evaluate the founders along with product, because both things must work for success to happen. Also, they will evaluate the company’s ability to scale up and continue to grow. Finally, they self-evaluate, and make sure they aren’t getting caught up in the latest “industry craze”. To close the blog, I will leave you with some sound general advice from Mark Herschberg:

 
“New investors tend to get caught up in the idea. There are lots of great ideas; lots of ideas that can absolutely work and make money. The biggest hurdle facing companies usually isn’t the idea, but the execution. It’s being able to scale up the sales, marketing, staffing, and operations. It’s creating repeatable, scalable processes all while the company, customers, competitors, and industry change under their feet. Yes, make sure the product/company is viable, but the real diligence is making sure they are likely to execute well over the next few years.”