How To Evaluate Pre-Revenue Startups

by Kera DeMars

Imagine this: you're approached by an early stage startup founder who is raising her seed round.

She has no revenue, and no metrics on customer retention or engagement.

How do you evaluate the company without any KPIs?

Here are two questions to ask (and answers to look for) when you're interviewing an early-stage founder.


1. Who is your customer?

For most companies, acquiring new customers is their biggest obstacle. And if they can't get past that obstacle, they won't survive.

Understanding who you're selling to is the first step in the customer acquisition process. 

Here are examples of a bad answer to this question, and a great answer:

Bad Answer: our customers are women between the ages of 25-45.

Great Answer: our customers are professional women between 25 and 45 years old who are earning $100k or more. They work 40+ hours a week and spend at least 1 hour a day commuting to work.

What we're looking for here is detail – proof that the founder understands the problem she's solving, knows who she is solving it for, and has a clear sense of how her product will fit into her customers' day-to-day lives.

A founder who can't clearly define her customer persona has more work to do before taking your check.

 

2. How will you find your first customers?

The goal with this question is to understand how the founder is thinking about the marketing channels available.

We are not asking her to know which acquisition channels will be easiest to scale. 

At this stage, even non-scalable channels demonstrate that the founder is resourceful and can convert potential customers into active users.

For example, let's say the founder's audience is moms who spend a lot of time in the car.

One method to acquire early customers is to talk to her neighbors who are moms. 

This isn't a scaleable channel. There is a finite number of potential customers in that group.

But if she's able to convert those mothers into users, she'll learn loads of information about them, which she can apply as she grows her marketing initiatives.

For example, she'll learn...

  • which social media channels her customers use most often
  • what websites her customers visit
  • where they hang out offline

All of these data points can inform her customer acquisition strategy down the line.

TL;DR: You can make a smart bet on a pre-revenue company by learning more about who their customer is, and where they are going to find their first customers. 

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