At a high level, when evaluating the financials of a startup, you can generally group it into one of the following buckets:
Unicorns are companies that are given a $1 billion valuation by investors and venture capitalists, and potential unicorns exist in each of these buckets. Unicorns are not always easy to spot, so how do you know what to look for?
Three key questions to ask when analyzing a startup’s financials?
- Is the startup growing sustainably?
- Is there a clear path to breakeven and profitability?
- In order to earn investors a strong return, what does this startup need to accomplish before its next round of financing, and how realistic are those goals?
Show Me the Money!
There’s nothing better than a startup that is already in the black. They don’t need your money, which makes you want to give it to them all the more!
But profitable startups are a different animal. In this case, the unicorn (or potential unicorn) isn’t hard to spot – the company is already throwing off cash, and you and every other investor is fighting to get in!
Instead, the key risk is whether or not you’re overpaying for the unicorn, and how hard and fast the unicorn can run.
Three key questions to ask when analyzing a profitable startup are:
- Why is this company able to achieve profitability?
- Where are the untapped areas of growth, and why would a capital infusion not only increase, but turbocharge growth?
- What metrics do you need to hit to give investors a return of three to ten times capital?