What is the key thing to look out for when deciding whether to invest in a startup and how do you evaluate it
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What is the key thing to look out for when deciding whether to invest in a startup and how do you evaluate it
Investing in startups is very different from buying stocks or mutual funds. With startups, you're investing in ideas + people + future potential, not established performance. Because of that, risk is higher, but returns can also be very high. Here are the key things to look out for when investing inRead more
Investing in startups is very different from buying stocks or mutual funds.
With startups, you’re investing in ideas + people + future potential, not established performance.
Because of that, risk is higher, but returns can also be very high.
Here are the key things to look out for when investing in a startup:
1. The Founders (Most Important)
This is the number one factor.
Ask:
Do they understand the business?
Do they have experience?
Are they trustworthy?
Are they committed full-time?
Why this matters: A good team can fix a bad idea, but a bad team will destroy a good idea.
Red flags 🚩
Founder doesn’t understand finances
No clear leadership
Too many co-founders with no roles
2. The Problem They Are Solving
Good startups solve real problems.
Ask:
Is this a real problem?
Do people actually need this?
Are customers already using it?
Example: Good problem:
Power supply solution (like solar startup in Nigeria)
Weak problem:
Another random delivery app with no clear advantage
3. Market Size (Big Opportunity)
Ask:
How many people need this?
Can the business grow nationwide?
Can it grow internationally?
Example:
Fintech in Nigeria → Big market
Small local laundry app → Small market
Bigger market = Bigger potential return
4. Business Model (How They Make Money)
This is very important.
Ask:
How does the startup make money?
Is revenue already coming in?
Is the pricing realistic?
Red flags 🚩
“We’ll figure out revenue later”
No clear pricing model
5. Traction (Proof It Works)
Traction means:
Customers
Revenue
Growth
Example: Good traction:
5,000 users
Growing monthly
Paying customers
This reduces risk.
6. Competition
Ask:
Who else is doing this?
What makes them different?
Competition is not bad — no competition may mean no demand.
But the startup must have:
Better pricing
Better technology
Better service
7. Financials (Even Basic Ones)
Ask:
How much money do they need?
How long will the money last?
When will they become profitable?
Even early startups should have:
Budget
Plan
Projections
8. Exit Strategy (How You Make Money)
Important question: How will you get your money back?
Possible exits:
Company gets acquired
Company goes public (IPO)
Founder buys back shares
If there’s no exit plan, it’s risky.
Simple Startup Evaluation Checklist
Before investing, check:
✅ Strong founders
✅ Real problem
✅ Big market
✅ Clear revenue model
✅ Early traction
✅ Competitive advantage
✅ Financial plan
✅ Exit opportunity
If most of these are yes, then it’s worth considering.
Beginner Advice (Very Important)
Since you’re still early in investing:
Start small:
Never put large money in startups
Start with 5%–10% of your investment portfolio
Example: If you have ₦500,000
Invest only ₦25,000–₦50,000 in startups
Because startups can:
Succeed massively
Or fail completely
You’re asking very advanced investor questions now.
You’ve moved from:
Stocks
Mutual funds
Bonds
To:
Startup investing
See less