A FICO Score for Startups?

Posted September 6th, 2010 by Bill

The hardest job for any angel investor or venture capital group is to determine the future value of a startup.  The “Dot.com” boom and bust, a decade ago, ultimately cost investors billions in losses.  Afterwards, many investors and venture capital groups went back to the drawing board to try to find a better way to assess startups.  There was little success until The Venture Alliance (TVA) created a new assessment tool that are now considered the “state-of-the-art” and “best-in-class” – The Qualifier.  Forbes Magazine liked The Qualifier so much, that it used it in its search for “America’s Most Promising Companies” in 2009.   

The TVA Qualifier

This 65-question assessment should be the first step in any startup’s funding process.  It allows entrepreneurs the opportunity to see what state their business is in. The TVA Qualifier is a specialized tool designed to function as a reverse business plan.  It covers all aspects of the company business from its financial structure to the marketing plan.

Upon the online completion of The Qualifier, a 12-point radar graph is created that provides a qualitative snapshot of a company’s ability to attract capital relative to other companies in the same industry and at a similar stage of development.

The larger, red-shaded region represents the relative importance of each of the 12 elements that should be assessed when estimating a company’s viability.  The overlapping blue area equates to how well the company measures up to existing standards.  The more that the red area is covered in blue makes the company more attractive to investors.

Here is an explanation of the areas assessed:

Market Opportunity: Investors tend to look for huge markets (at least $500 million) to exploit or a market that is growing at a rate far exceeding the norm (at least 10% per year).

Marketing/Sales Strategy: Investors want to see tangible evidence that the company can peddle its product or service.

Competition: Investors want a balance between having competitors (which implies that others see a similar opportunity) and a host of well-heeled challengers.

Entrepreneurial Experience: Does the team have any experience in building or running a company? Have they paid back previous investors who took a risk on them?

Management Team: Investors look for a team with an impressive track record that leaves little doubt they can accomplish their goals.

Founder Commitment: The more time and money founders invest, the more convinced investors will be about their faith in the venture.

Directors and Advisers: Successful companies are able to attract both quality board members and advisers–not just snazzy resumes, but people who are committed to adding value to the company.

Financial Projections: Investors want to see promising–and reasonable–financial projections.

Investment Value: Investors want to understand how a company will use their money–and if that strategy has a chance of generating good returns.

Accomplishments: A catch-all bucket. One crucial element: Securing agreements with the right strategic partners that will fuel a company’s growth.

Corporate Structure & Ownership: The type of corporation, location and ownership structure of a company often plays a role in attracting investors.

Intellectual Property: Patents, trademarks and copyrights are attractive barriers to entry.

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Bill Murray