Monday, August 20, 2007

Evaluating a software start-up

Following my previous post on "The Business of Software", I would like to introduce an interesting "checklist" that helps evaluate the potential of a software start-up, from a VC's point of view.
A good start up should be measured on these points
  1. Management Team: they should be competent and experienced professionals with sufficient background on the technology/product to be marketed
  2. Market Attractiveness: high entry barriers to keeps out competitors, negotiation power for suppliers/buyers, no good substitutes, could be a complement to dominant products
  3. Compelling offering: it has to be a "must have" product, service, or solution
  4. Customer interest: evidence of a large willing-to-pay user base
  5. Credibility: a case history, a reference client, a testimonial gives credibility to the product and the technology
  6. Business model: VCs want early growth, rapid break-even
  7. Flexibility: strategy and product offering must be adaptable to new inputs from competitors, new technologies, new user needs
  8. Payoff potential: the ROI must be high (>25%). It usually forces the start-up to develop a product, which could be risky but more profitable than providing solutions and software services.

The author, Michael A. Cusumano, explains the meaning of each point and applies them systematically on real-world companies like Numega, Cybergnostic, firstRain.
Even if it is an a posteriori analysis, it gives a clue on how to evaluate a potentially explosive startup.

Needless to say, I suggest a deep and reasoned reading of his book.

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