Startup Investment: How To Mindfully Invest In The Right Startup Using Data

The old saying goes, “Money makes the world go ‘round”. Nowadays, we might say the same about data. When we study data, we discover it, measure it, and evaluate it. Then we figure out how we can use it. 

Corporations of all sizes love data. They take raw data and transform it into information that influences business decisions, such as product creation, promotional strategy, or recruitment activities. Data can tell you how successful your company is, how much you’re selling, and how much money you’re earning or losing.

Data-driven decision-making (DDDM) is a process that involves gathering information based on verifiable goals or KPIs, evaluating trends and facts from these observations, and using them in a variety of areas to establish strategies and activities that benefit the organization.

Fundamentally, DDDM involves moving towards key business objectives by using data that has been processed rather than flailing around blindly in the dark.

Why should you use data to make an investment decision?

As an investor, one of the most significant choices you ever make is deciding where, when, and with whom to invest. You need this information whether you’re investing in online shopping sites or online software tools.

Make the right decisions, and you’ll experience success for many years to come. Make the wrong decision, and it could mean losing money. Therefore, you need to make investment choices wisely. Your chances of making the right investment depend on having the correct data.

Knowing the source of your data is important. Everyone seems to be an expert on data nowadays, and if you don’t do your homework, you might end up with faulty data that leads you to risky investment decisions.

On the other hand, it’s easy to get bewildered by all the options that are available to you. Having too much data leads to what we call “analysis paralysis” – getting so engrossed in analyzing data that you fail to take action. While it’s good to analyze your data carefully, you also need to know the right kind of data to analyze so you won’t miss out on fast-moving investments. 

Your data could come from an extensive business database or a customer relationship management (CRM) solution. Both sources can provide you with relevant information to help you understand the startups you’ll be working with. Using a business data API will also help you identify businesses with promising products that you can invest in.

The most successful investors don’t play things by ear. Instead, they make lightning-quick decisions using advanced data to locate startups with tremendous upside. It might seem intimidating at first. But with enough training and practice, you’ll soon identify investment targets so quickly that other investors might think you’re just winging it too.

So how do you use data to find potential businesses to invest in? Read on to find out.

How to use data to make your next investment decision

The investment process begins long before you hear an entrepreneur’s pitch. Before investing in a company, you should examine their interests and motivations. You should also check the public records and other information about the company. Finally, investors can study the industry’s patterns and competitors. 

1. Test the market 

A lot of your success will depend on how efficiently you scout startups. Even Warren Buffet wouldn’t waste money traveling across the country searching for the next investment opportunity without a definite strategy. Whenever possible, you need to optimize the process and keep your expenses at a minimum.

Most conventional venture funds allow you to invest in companies in exchange for a portion of future profits. In contrast, platforms such as 1000Angels give you the opportunity to attend exclusive networking events with startups for an annual membership fee. The beauty of these platforms is that they curate the investment opportunities for you, letting you get your feet wet in the investment market with relatively little risk. 

You can also try test-marketing the product and use the results to help you arrive at a decision. 

Testing the market through limited sales offers you two significant advantages. First, it lets you assess the potential sales performance of products under normal market conditions, giving you a good idea of a company’s long-term value. Second, it offers you and the startup’s management team – the chance to find and fix flaws in the product before you invest in it. 

2. Know the growth potential 

Some investors find market research boring. Instead, they prefer to read the conclusions reached by investment analysts. Many analysts sift through volumes of current data and information, then offer forecasts about a company’s anticipated growth rate. 

However, it is important to note that while these analysts are experts in their profession, their projections can be way off the mark. While you can use these projections as a starting point, it is not enough to make sound investment decisions.

When evaluating an organization’s dynamics, we try to look at its historical performance and growth rates to determine its financial strength. You can also look at other factors, such as previous demand for the company’s products, customer sentiment, or even the company’s performance under previous leadership, to enrich your evaluation.

You should also try to get insights from people in your sector. Send emails to industry experts. Use Gmail notes to keep track of everything.

Investing in a startup is all about getting the most out of your investment. Your ROI will depend on the future growth of the startup. Before you decide to infuse money into a business, do your homework, study the company’s previous performance and use that data to predict how well it will perform in the future.

3. Competition analysis

Competitor analysis is complicated. If you’re relatively new to the business of investing, analyzing and predicting the performance of competing companies can be very challenging. It starts with the struggle to get company details. Sometimes, you’re left with more questions than answers.

Source: Buffer

Competition analysis deals with more than just your investment target’s competition. It also considers other factors, such as their respective target markets and the nature of the solutions they offer (see the diagram above). Before you start comparing the business with its competition, you should:

  • Choose the correct competitors to evaluate
  • Know which aspects of the market and competitive advertisements of your rivals are worth evaluating
  • Understand where to search for the data
  • Understand how insights can be used to boost your own company.

When you do competitive analysis well, it will provide you with plenty of insights to support your own business decisions. Specifically, it will let you:

  • Define the startup’s unique value proposition. 
  • Identify the elements of competitors’ products that consumers trust the most
  • See where the product is headed by pinpointing its competitors’ shortcomings
  • Uncover parts of the market that aren’t fully served by the competition
  • Find gaps between what the market offers and what consumers look for in a product

Based on those insights, the competitors you choose for the study will determine the insights you will get at the end and the decisions you will make. That is why it is important to include multiple types of competitors (bigger or smaller than the company, direct and indirect competitors) in the study if you want the findings to be thorough. It’s best to include at least one opponent from every group in your study.

4. Quantitative analysis of the startup

With the introduction of modern technologies, quantitative investment strategies have developed into complex tools, but the origins of quantitative strategy go as far back over 80 years. 

Companies and individuals alike benefit from the advice given by quantitative trading analysts (also known as “quants”). In bigger wealth management firms or hedge funds, large teams of quants make predictions about the companies they’re tracking. 

Here is how quantitative analysis works:

  • Quants look at massive amounts of data to define trading trends, then create models to identify these patterns. These trends are used to make predictions about share prices and company valuation.
  • Once the quants process the data using the models they created, the results are used to set up automated trades.
  • The data that quants process all deal with tangible aspects of the business, such as the cash flow, revenue for a specific period, and operating costs. Depending on the business, quantitative analysis may also include other metrics such as search volume, web traffic, or abandonment rates.

You may notice that the second bullet point refers to “automated trades”. Most startups don’t go public immediately, so quants can’t set up auto-trades. However, you can set up data-based alerts so that you can approach the startup owner and give them an offer that is a win for both sides. Quantitative analysis helps you identify the right businesses to invest in at the right time.

5. Financial projections to decide your investment 

What would be the point of the investment at all without evaluating the return on your potential investment? ROI is a crucial financial probability metric you can use to measure an investment’s return or gain. 

It is rather easy to calculate ROI. The formula isn’t complicated:

 ROI = (Investment Net Profit/Cost) x 100

Getting the right data for calculating ROI, though, tends to be a bit complex. Different startups have different methods of estimating their net profit. Many businesses tend to overestimate their projected earnings due to excessive optimism. Whenever a pitch from a startup seems too good to be true, it probably is. 

ROI is important, but it’s not the only metric you’ll need to track. While investing in itself is a gamble, you also need to be smart about the things you gamble on. Indicators like the product’s growth potential, the market demand for the startup’s services, and the state of their competitors will all play a role in the financial projections you’ll be making. You can also look at the company’s business model to make a projection about its long-term viability.

6. Plan your exit

There are two key financial questions for startup investors: 

  • How much do I need to invest, and when do I need to invest in them? 
  • How much am I going to get back, and when am I going to get it? 

A detailed financial forecast will answer both of those questions. 

The second question forms part of your exit strategy. Knowing the right way to pull out your investment will spare you the headache of losing the money you’ve pumped into the startup. 

However, exit strategies don’t need to have negative connotations all the time. Depending on how the startup performs, you could exit it by giving up your shares to the management, selling your shares to another investor for a much higher price, or selling your stake at a loss if you feel there is no other way to move forward. 

In closing

A data-driven investment model allows you to measure the performance of different startups and compare them with each other. It considers factors such as the demand for their products, the state of the market, and the amount each startup is allocating for R&D to come up with honest, unbiased assessments that will help you make an informed investment decision.

Remember, you cannot have too much data. Each piece of data you analyze will give you a clearer picture of a company’s current state and direction. Data will also help you come up with good financial projections that will in turn empower you to exit the startup on your own terms.

Above all, a data-driven investment model is heavily influenced by timing. Buying in when the value of a startup is low will allow you to minimize your losses in case it doesn’t pan out and maximize your profits if it blows up. On the other hand, buying too high will expose you to painful losses that will take time to recover from. Analyzing data properly will help you identify these peaks and valleys and tell you the proper timing to make an investment offer.

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