What Should You Look for When Investing 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 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

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