Selecting high-potential startup companies to work with can be a matter of attracting the right types of businesses for your ecosystem. From there, evaluating the potential success of the startup may be both difficult and demanding.
All too often, we have seen startup companies that look attractive on paper and count big investors among their supporters, only to eventually fail. Fortunately, we has interviewed the top university-linked incubation programs in the world and can provide you with solid information on how to attract, evaluate and select startup companies and entrepreneurs to your program.
When you think of a “high-potential” startup, do you think of unicorn businesses like Uber, Twitter and AirBnB? Perhaps you think of a hard-working entrepreneur who has built a small organization on her own and established steady growth. Defining what it means to be a “high-potential” startup may not be easy from the outside looking in. While numbers such as margin, acquisition cost, churn, or profit may give an indication of the health of the startup, it is really a one-dimensional way of looking at the potential. Consider the following points in addition to the numbers:
Profit and revenue are the result of a positive impact that the startup has had on their industry. Measuring success of a startup by the impact they have had and the difference they have made in an emerging market or established industry can form a picture of success.
A startup company with satisfied customers means that they will keep attracting new business through great word of mouth. Satisfying their customers by building a solid product with high potential in the market and responding to feedback shows the attention to detail that startups need to build successful companies.
Startups with freedom in choosing where they are located, how they spend their time and how they create their product or service tend to be more successful over time. Freedom is an important trait to remember when choosing a successful startup partner and moving forward with incubation.
We was keen to ask our top incubation programs how they attract, evaluate and select high-potential client startups. Guinness Enterprise Centre in Dublin, Ireland, is a top incubator with a dynamic environment and impressive scores in Program Attractiveness.
According to Eamonn, part of the attraction of working with GEC is the reputation of their programs, given credibility through word of mouth. He further goes on to say that their social media is an important part of keeping GEC’s message in front of the proper audience and increasing their world of mouth. Incubation programs, therefore, should harness the power of their university partners, their alumni and graduates to spread the world on the quality and success of the program. Word of mouth driven by successful graduates is one of the most powerful testimonials an incubator program can have.
Financial numbers, impact, satisfaction and freedom aside, the evaluation of a startup should keep the long-term success in mind. The business model that a startup follows can be the factor in determining whether they will sink or swim through the incubation process.
Begin by gathering information on the overall strategy of the startup company and how they have defined their market. Then discover what the startup contributes to the market in terms of product or service and how they will break into the market they have defined. From there, determine how the startup attracts and satisfies their customers. Keep in mind that, as a startup, most of this will be experimental and will evolve and grow with the startup.
To simplify the evaluation process, sort their business plan into four areas:
- Margin (cost vs. selling price)
- Customer attraction, support and retention
- Market attraction
- Overhead (development and scale-up costs)
The health of these four areas in the startup can determine if it will scale up and graduate within a reasonable amount of time or at all, in some cases.
When you reach the point of selection of a high-potential startup, you should expect that the startup would be evaluating you at this stage. If they are not, this may be a red flag. At the very least, your potential startup partner should expect the following five things from you at the selection stage:
- In-person interview
- Discuss the network and the success of past support
- Discuss how they will be measured and evaluated
- Stress the hard skills provided by your program, such as legal support, financial modeling, investment management, due diligence, public relations, etc.
- Disclose ROI requirements and goals
After the due diligence is finished and you have made your selection, keep Eamonn’s words in mind and build a strong, lasting relationship. The success of the startup and the experience they have during incubation will reflect on your program in the long term. This credibility and successful track record will pay your program back by attracting more high-potential startups.