## How to Assess the Potential of a Startup at the Seed/Pre-Seed Stage

Co-Founder Ai presents a comprehensive framework designed to evaluate the potential of startups at the seed and pre-seed stages. This framework is invaluable for founders, venture capital firms, and startup employees alike.

# N.B. 1: Who Can Benefit from This Framework?

1. Startup Founders: Specifically, founders who are at the pre-seed or seed stage and are planning or aspiring to attract their first external investments in the US. For them, the framework answers questions like:

   • “Can our startup realistically attract venture capital from smart-money investors in the US?”
   • “Or should we consider pivoting?”

2. Venture Capital Investors (VC Firms): These include private capital firms, venture capital companies, and angel investors who occasionally sift through numerous applications—most of which may be typical and unremarkable. They independently screen new pre-seed/seed startups across different markets and industries in search of promising opportunities. For them, the framework addresses the question:

   • “Statistically, is this startup and its team worth investing in?”

3. Startup Employees: Employees at pre-seed or seed-stage startups who are either being invited to join such a startup or are already working in one. For them, the framework answers questions like:

   • “Was it worth leaving my current stable job to dedicate my time to this startup?”

# N.B. 2: Defining a “Startup”

By “startup,” we refer to a company that meets three criteria:

• New: Not older than 3 years.
• Fast-growing: Achieving a minimum revenue growth of +15% MoM and/or +20% MoM active users.
• Developing an Innovative: Meaning a product/service/platform that is “more sought after than those existing in the market.”

# Startup Potential Checklist

Use this checklist to evaluate your startup’s potential and attractiveness to venture capital firms and other investment opportunities:

1. 1m Users

   • Does your startup’s product have over a million potential users?

2. Growing +20%/year

   • Has your product’s market been growing over 20% per year consistently over the past 1-3 years?

3. Timely

   • Are your potential customers currently experiencing and actively seeking (i.e., paying for solutions to) the problem your startup addresses?

4. $1b TAM

   • Is the total market for solving this problem estimated at over $1 billion per year?

5. Mandatory

   • Does the necessity of solving your startup’s problem create a mandate by the government/laws?

6. Recurring

   • Are your potential customers required to solve this problem on a regular basis (e.g., daily/weekly/monthly)?

7. CEO

   • Has your CEO previously been a CEO or co-founder of a startup that was acquired for at least $10 million?

8. Team

   • Does your founding team collectively have over 10 years of expertise in the industry your startup is targeting?

## Summary

If you can answer YES to at least 4 out of the 8 points, then your startup at the seed/pre-seed stage has strong grounds for venture investment from smart-money investors in the US market. If not, then it doesn’t.

# Smart-Money vs. Dumb-Money

An important subtopic relevant to the subject requires separate attention:

## Smart-Money

Smart-money refers to external funding from reputable sources like venture capital firms, angel investors, and private equity companies that offer more than just capital. They provide expertise that complements your startup’s competencies, such as:

• Assistance in operational management.
• Support in entering new markets.
• Access to a network of potential clients.

Typically, at these stages, investments are made via SAFE or KISS agreements. These investors rarely take over 10% equity, focusing on growing their investments rather than managing startups directly. For example, Y-Combinator companies value friendly access to an alumni and VC network as part of their investment.

## Dumb-Money

In contrast, dumb-money refers to funding received from unprofessional, unqualified, or toxic investors. These investors often make decisions based on emotions, intuition, or personal biases. Characteristics of dumb-money investors include:

• High Equity Demands: They usually require more than 15% equity or even a controlling stake.
• Operational Interference: They tend to interfere in your business operations.
• Debt-Based Investments: Typically invest via Convertible Notes, effectively turning venture investment into debt, where you carry a liability regardless of your startup’s success.
• Lack of Due Diligence: They may promise “support through connections” but avoid specifics and formalizing these promises.

## Summary

At the seed/pre-seed stage, do not accept dumb-money; only pursue smart-money from reputable venture capital firms, angel investors, and private equity companies.

For more insights and tools to evaluate your startup’s potential, visit Co-Founder Ai and explore opportunities with top venture capital firms, angel investors, and other investment avenues.