Fabrice Grinda’s Nine Criteria For Investing In Startups
Private equity investor Jeffrey Paine recently sent me a list of criteria that serial New York entrepreneur Fabrice Grinda usesÂ when he assesses companies. It’s a good guide to follow when you set up a new venture.
Serial entrepreneur Fabrice Grinda knows all about creating new businesses. His current and previous companies – OLX, Allmydata, Zingy and Aucland, to name a few – have been successful to varying degrees. Fabrice himself has even been featured in TIME magazine for the success of Zingy, a mobile ringtone company.
Fabrice Grinda’s Nine Criteria for Investing in Businesses
1. At least a $1 billion addressable market
This criteria is inherently personal and depends on the entrepreneur’s ambition, but there are good reasons to target larger markets – It’s easier to obtain funding. Many Internet businesses have a certain amount of fixed costs but limited variable costs, therefore the larger the business, the higher the net margin. I find it more interesting to build larger companies. This does not mean that the market must be a $1 billion market at the launch of the company, but that it must have the potential.
2. A valid business model understood from the get go
There is only a 5% chance that a company created today will still be around in 5 years. I have not seen official statistics, but many VCs seem to believe that only 0.1% of the company started without a valid business model succeed. It’s so risky to create a company to begin with, I would rather have all the odds in my favor. For clarification purposes, by having a valid business model I mean understanding how you are going to generate money and having a good sense of the gross and net margins at the creation of the company.
3. Does not require more than $2 million in seed or $15 million in first round (venture capital) VC money
If it requires much more, the business might be too capital intensive which could lead to too much dilution and suggest that this is an idea that is easier for a large incumbent to fund rather than a new startup.
4. A business where you have a real shot at being one of the top players – at least in the region you are targeting
Avoid entering businesses where many players are well-funded or where the incumbents have a sustainable advantage. That is not to say not to enter businesses where there are incumbents – just make you have a hard-to-replicate edge on them – after all Skype did extremely well because it entered the telephony market with a radically lower cost structure than the traditional telcos and used it to its advantage.
5. A scalable idea
This is again a very personal criteria. Walmart and Starbucks are great businesses, but I would rather not be in a business where I need to open a new store to increase my sales as it leads to slower growth and greater capital requirements. Internet businesses are magical as they give you the ability to build and grow global companies in record times – just look at what Google, eBay, Skype and many others accomplished in less than 10 years – in some cases in less than 5 years!
6. A business with little or no risk of disintermediation and/or margin compression by suppliers and/or customers
You are in a much safer position if you are much larger than your customers and/or suppliers. Walmart exerts tremendous pressure on its suppliers which are much smaller than it is and depend on its sales. eBay can also continuously increase prices on its sellers – none of which is in a meaningful position to fight back on its own.
7. A business that is in a rapidly growing market
A rising tide raises all boats. Growing markets generate more interest from the press, consumers, customers and suppliers. Moreover, if you are gaining share in a rapidly growing market, this can create exponential growth.
8. An idea that I know how to execute on or can learn how to execute on
9. An idea that I like and want to do
One of the keys to happiness and success in life is to do things you love and are passionate about!
You can read Fabrice Grinda’s blog here.
Daniel Goh is the founder and chief editor of Young | Upstarts, as well as an F&B entrepreneur. Daniel has a background in public relations, and is interested in issues in entrepreneurship, small business, marketing, public relations and the online space. He can be reached at daniel [at] youngupstarts [dot] com.