How private equity investors evaluate startups-- and what founders can do about it.

1. Building a Stable, Fundable Startup How private equity investors evaluate tech startups, and what founders can do about it.

2. Since every tech startup is unique– how do private equity investors (angels & VCs) gauge which have potential, and which don’t?

3. Many investors, after years of interacting with entrepreneurs and seeing thousands of new companies, chalk it up to “ gut instinct”.

4. In a simple form, “gut instinct” can be spelled out as an objective analysis of the startup’s ratio of assets to liabilities, and progress to backsliding, over a period of time.

6. In this form of evaluation, there are 4 basic types of startup companies– 3 of which are “unfundable”, and will largely be rejected by investors. Let’s take a look at each type…

7. Style 4: “Corporate” This type of startup has a large assortment of resources & assets in the project (funding, talent, equipment), but low or little tangible progress to show for it.

11. Style 3: “Stagnant” This type of startup has low resources & assets in the project (funding, talent, equipment), and low progress. They’re not going anywhere. 

16. Style 1: “Sexy” This type of startup has low resources & assets in the project (funding, staff, equipment), and high progress. They’re kicking ass!

20. Style 2: “Stable” This type of startup has high resources & assets in the project (funding, staff, equipment), and high progress.

23. The 3 “ Unfundable ” Styles (in order of attractiveness to investors) 1: “ Sexy ”: interesting or exciting to discuss, but too risky to be serious about. 3: “ Stagnant ”: no interest, not memorable, but nothing specifically wrong 4: “ Corporate ”: red-flag, avoid, high likelihood that large amounts of resources will be wasted/lost

25. The 1 “ Fundable ” Style 2: “ Stable ”: great momentum, trustworthy team, interesting market opportunity with good indicators that the startup will continue to grow in a financially viable way, and provide a good return on investment. Ironically, these types of deals are the 2 nd most “attractive”– they’re not as glamorous at first view, but the metrics, facts, and team are solid.

27. “ But, I don’t want funding, why should I care?” This is a completely valid question. The answer is simple: Investors evaluate business opportunities for financial feasibility and long-term viability.

28. If the project you’re working on doesn’t stack up to these basic standards, it probably has a very short shelf life .

29. So, why not spend your time & efforts in a project that has the maximum chance for success? By taking a little extra time to consciously choose the way in which you’re operating your startup, you can prevent errors and maximize the venture’s potential to grow and sustain itself over time.

30. One of the most exciting things about the work we do at Portland Ten, is the opportunity to help founders see exactly where they are, and shift their startup’s operating style to be healthy, financially feasible & stable over time.

31. Best of luck to all founders in their startup efforts, from everyone at Portland Ten! Growing ten $1MM startups in Portland by 10/2010. www.portlandten.com