Venture capital research does not offer definitive evidence of a single best way to invest in start ups. There are numerous options for how to source deals, conduct due diligence and manage ongoing investments. At Carolina Seed Investors we try to employ two particular investment tools to more efficiently invest in start ups. The Commercialization Engine is our mechanism for sourcing deals while Cradle Investing is our methodology for conducting due diligence and managing investments.
Any good investment will require the investor and the entrepreneur to come to an agreement on the value of the investment. CSI breaks down the valuation process into 4 questions.
1. Is there a good idea at the center of this entrepreneurial venture?
2. Can the good idea be made into a good business?
3. Can the good business be a good investment?
4. Can a deal be negotiated between the entrepreneur and the investor?
When Should an Entrepreneur Approach CSI (or any other early stage investor) for an Investment?
This is a common question among entrepreneurs and it has nearly as many answers as there are investors. In general investors want to be aware of all potential investments as early as possible but don’t want to make commitments until the business is ready. A business is ready when the management team can demonstrate they know how to run this business.
It is not easy for an entrepreneur to demonstrate they know how to run a proposed new business. In some situations, this requires generating revenue but in other situations an entrepreneur can demonstrate their skill by taking appropriate pre revenue steps. One example would be to run low cost focus groups to examine target customers buying habits. Such action could show investors an understanding of the market and enhance the probability that the product being built addresses a market need not just a developer’s desire.
CSI makes investments once the entrepreneur can articulate a clear path to market and demonstrate that they are taking the appropriate actions to move along that path. We often deploy resources to help guide entrepreneurs when taking the first steps.