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How to Evaluate Startups

how to evaluate startups

Evaluating High-Potential Startups


Evaluating startups involves analyzing various indicators that suggest potential for success and recognizing red flags that could indicate trouble. This process is crucial for investors looking to make informed decisions and for entrepreneurs aiming to understand what makes a startup attractive to investors.


Indicators of High Potential:


  1. Large TAM (Total Addressable Market): Targeting a sizable market indicates potential for significant growth.

  2. Rapid Revenue Growth: Consistent and steady growth over 100% year-over-year shows strong market traction.

  3. Low CAC (Customer Acquisition Cost): A favorable LTV (Lifetime Value) to CAC ratio over 3:1 indicates efficient customer acquisition.

  4. High Activation/Retention Rates: Activation rates above 40% and churn rates below 5% monthly suggest strong user engagement and loyalty.

  5. Experienced Team: A team with domain expertise and passion enhances the likelihood of successful execution.


Red Flags:


  1. No Clear Business Model: A lack of a clear path to profitability is risky.

  2. High Burn Rate: Unsustainable cash usage can lead to financial instability.

  3. Unproven Market Fit: Lack of traction and engagement suggests weak product-market fit.

  4. Founder Conflicts: Dysfunctional team dynamics can hinder progress.

  5. Unrealistic Projections: Overly optimistic forecasts without solid grounding can mislead investors.


Evaluating startups requires a keen eye on these indicators and red flags to assess their potential accurately. Investors should weigh both the promising signs and the risks to make informed decisions.

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