1) The Problem — Analysing Your First Investment

Innovative ideas are often associated with startups. However, an innovative idea might not be a solution to any significant problems. More important than building ideas, is solving problems that matter.

The first thing to understand in a startup is, “What problem are they trying to solve?” This is an important question to ask when considering to invest in a startup.

People are constantly looking for new ways to solve their problems. As long as they have problems, they will be searching for easier, faster, cheaper, and smarter ways to improve their everyday life. Hence, a company that can offer a solution to a burning problem, will have a head start because they already have potential customers with a need for the offered solution.

Be clear to differentiate between a ‘must have’ and a ‘nice to have’ solution. A ‘must have’ product or service offers a solution to an urgent and important problem, while a ‘nice to have’ product or service is solving a problem, that is neither urgent nor important. In some cases, the people might not even recognize they have a problem.

What problem is the startup trying to solve?

To figure out what problem the startup is trying to solve, it is important to understand the different perceptions of problems. Some problems might seem minor, but even a small problem, that is a problem to a lot of people, can be significant. When a problem is significant for enough people, there will be a demand for a solution to it.

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A market, where many people have big problems, seemingly has huge potential, but keep in mind that such markets most likely already have many competitors present. Differentiation becomes the key here.

Potential also lies in small problems that many people have. Let’s take Airbnb as an example. Two groups of people had a small problem. Travellers, who didn’t have enough money to stay in hotels or had a tough time finding accommodation, and apartment owners, who wanted some additional revenue. Airbnb spotted this problem and solved it.

The opposite is also worth noting, some problems are important but only for a small number of people. Let’s use designers as an example. They were lacking a design and prototyping tool, that focused on collaboration and sharing their designs with others. Here’s where InVision came to the rescue.

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These problems are harder to identify because people, who are not working in the design field, will probably not have this problem. Therefore, it is harder to recognize problems outside of our own fields, that we are not involved in.

It is important to see the bigger picture and understand how big of a problem the startup is actually planning to solve. To understand what problem the startup is solving and whether it is a significant one, it is necessary to do as much research as possible.

Ask yourself, does the startup solve a big enough problem that someone is willing to pay for the solution?

Does it matter to you?

Finally, consider whether the company is doing something which matters to you personally. If the company is working within an industry you understand, there’s a bigger chance that you will be able to contribute to the success of the company, both directly as a client by giving the company advice, mentorship, or introductions; and by shouting about the company to the relevant audience that is your network.

“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” — Peter Lynch

About Funderbeam

Funderbeam consists of three parts:

  • Free data intelligence on investors and startups
  • Tools for startups to raise funds and for investors to co-invest
  • A marketplace for investors to buy and sell their investments

Our vision is to provide everyone in the world with equal opportunities, whether you are building a company, or looking to fund the next big thing. What if the next Silicon Valley is not a place, but a platform?

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