Assessing early stage startups and the Investment Readiness Level

I was reading Steve Blank’s post here and it got me thinking about how do you really assess an early stage startup to in order to make business decision (ie invest, buy out, integrate etc)?  What tools or methods are used that offer a common process and consistency?   We can use the Business Model Canvas and assess each of the 9 boxes or use something like VC Fred Wilson’s simple litmus test of 5 drivers (I’ve used Snapchat to illustrate):

  1. Right Person: Who are the people running the startup? Why are they passionate about this idea?  What past experience do they have? Do they have some special competitive advantage or domain expertise? Are they willing to leave their full-time work today to pursue their startup? With Snapchat for example it was Evan Spiegel and Bobby Murphy in 2011 both from Stanford university, who where working on a startup called Future Freshman designed to help high school kids get advice on colleges, career etc.  They later pivoted realizing kids key concern was over their life being recorded permanently and how this would hinder their career prospects.
  2. Right Idea: Is the idea solving a real problem?  Is the solution a vitamin (solving a trivial problem) or drug (solving a serious problem)? With Snapchat it was a big problem amongst teenage: teens don’t want their daily lives permanently recorded
  3. Right Product: Is the product designed well enough to consider the target customers usage and behavior?  Is it simple to use or apply? With Snapchat users can control who and how long any communications was sent. Best of all, it was all on their mobile –  target customer’s prime communication method
  4. Right Time: What market, government or social trends suggest it is the right time to launch such a product? With Snapchat, as more and more teens record their life digitally using social media, they needed another way to communicate freely and safely without permanence.
  5. Right Market: What is the market being targeted? Is the market growing?  Who are the competitors? With Snapchat,  the product centered around mobile-native teens and social media activity  –  both trends expanding rapidly with limited alternatives.

The point I’m trying to make here is there no common language when assessing early stage startups.  This is why I like Steve Blank’s Investment Readiness Level (IRL).   I would like to devote more time on this because its a relatively new concept taken from a relatively establish method.

 

The IRL is based on the Technology Readiness Level (TRL) which is a measure to assess the maturity of an evolving technologies.   The TRL was used in 1980’s by NASA as a  way to describe the maturity and state of “flight” readiness of their technology projects and to help track projects (and budgets).  Steve has adapted this method (similar to that he did with the Business Model Canvas when Alexander Osterwalder created it in his book Business Model Generation) to assess early stage startups.  Providing more of an evidence-based way to determine where the startup is.

 

Here is the NASA  “thermometer” version to assess readiness of their projects:

 

NASA's Technology Readiness Level

NASA’s Technology Readiness Level

 

With the IRL, for the first time, you have common language to describe the reading this level for early-stage ventures.  This method can not only be used by VCs or Accelerators etc, but also inside large companies to help convince an existing business unit its worth integrating or clarity over making it a spin-out.

 

The following slides have been take from Steve Blank’s presentation found here, but here are the key points:

 

  • Level 1 and 2:  Is the main (riskiest assumption) hypotheses understood?  Are all the hypotheses on the business model canvas listed/determined? Have is the startup articulating their customer value proposition?  Is this clear?
 Investment Readiness Level: 1 & 2

Investment Readiness Level: 1 & 2

  • Level 3 and 4:   Have the startup discovered a real problem worth solving and is the solution going to deliver on the customer value proposition they promised?  Does the startup have valid MVP that proves there is a strong Problem/Solution Fit?
Investment Readiness Level: 3 & 4

Investment Readiness Level: 3 & 4

  • Level 5 and 6:  Has the MVP been validated to determine Product/Market Fit? Is the right side of the business model canvas validated?  That is, does the solution delivering on the promise to the target customers?
Investment Readiness Level: 5 & 6

Investment Readiness Level: 5 & 6

  • Level 7 and 8: Is the left side of the business model validated? That is, have they got the right business partners to help them deliver the customer value proposition?
Investment Readiness Level: 7 & 8

Investment Readiness Level: 7 & 8

  • Level 9:  Do they have any investable metrics that matter? These including acquisition rate, activation rate, retention rate, referral rates or revenue?  That is can we assess their A.A.A.R.R?  You can learn more about AAARR here
Investment Readiness Level: 9

Investment Readiness Level: 9

 

Here is a summary of the Investment Readiness Level:

 

Investment Readiness Level

Investment Readiness Level

 

Here is an example of an early startup being assessed using IRL.  You can see this assessment in action in this video here.

 

Assessing a StartUp via IRL

Assessing a StartUp via IRL