A Quick Corporate Guide For Assessing Startups
Startup assessment using Technology Readiness Level (TRL) and Investment Readiness Level (IRL)
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Startup assessment using Technology Readiness Level (TRL) and Investment Readiness Level (IRL)
We’re often asked how we assess startup ideas and companies to determine eligibility for our startup programs and investments.
We receive hundreds of applications every year for each of our programs and we need to be able to train our staff to quickly assess if the startup has something ‘interesting’ that warrants a deeper level of analysis and consideration.
We thought we’d put a few thoughts down to provide some insight into our processes.
How do VC’s do it?
Recent data from DocSend (a popular presentation sharing platform), which tracks thousands of startup pitches, shows that VC’s spend less than 3 minutes on average reviewing a startup’s pitch deck.
So how does a VC assess startups so quickly?
Firstly, VC’s are very clear about the areas they invest in. They narrow their scope so they only need to focus on the startups that fit their investment thesis.
Secondly, VCs intimately understand the market they are in, particularly the market size, the competitive landscape and what the major trends and challenges are.
Finally, VCs make a preliminary assessment of the startups’ pitch deck against a predetermined criteria, which includes the key information they need in order to ascertain if a startup meets their criteria of ‘investment ready’.
For corporations, it’s important to have a clear criteria and understanding of what you are looking for, to avoid wasting countless hours reviewing startup approaches, having meetings and follow up meetings, often to find out you cannot do business with the startup or the startup is not ready to do business with you.
Without a developed process of assessing startups (which we recommend) here are a few tips to help you say ‘yes’ or ‘no’ to that first startup approach.
Hardware — Products and Systems
With hardware products and systems (project) the very first thing that you should endeavor to understand is the Technology Readiness Level (TRL), adapted from NASA and further developed by the European Commission for EU-funded research and innovation projects and the TRL scale was further canonised by the ISO 16290:2013 standard.
The investment readiness level will determine what stage the startup is at, and then determine what part of your company they should be talking to. Only fully developed products at TRL 9, should for example be sent to your business development department or your product marketing teams. Early stage product developments (TRL level 1–6) should be directed toward your innovation function or your research and development team.
The TRL will help you understand how far along the development process the project is, how much risk the project has of failure, and give you clues as to how much capital might be needed to complete the project and get it ready for customer deployment.
For corporations, your capacity to work with earlier stage products, to get involved in research and development processes or work on pilot projects, should determine if it is worth engaging with early stage companies. If you are not set up with the processes and teams to work with products that are not at TRL 9, then it is best to pass on the opportunity.
The TRL will tell you how far along the development pathway the project is, but will not tell you anything about the commercial viability of the project, and, if in fact, the project is worth doing at all.
Validating the Opportunity
Many good ideas do not see the light of day because there simply is not a large enough market, it will cost far too much to reach the market, or the price point necessary to unlock the market cannot be achieved.
This is where Steve Blank’s Investment Readiness Level (IRL) comes into play.
The early steps of the IRL (steps 2 to 6) attempts to answer the “why bother” question.
This model or more importantly the questions that it forces you to ask, are useful to determine if further conversations with the startup are worthwhile even if you are not a VC.
The questions are quite straightforward:
- What is the problem you are solving? (IRL 1)
- Who has this problem? (IRL 2)
- What do these people/companies currently do? (IRL 3)
- What solution are you proposing to solve the problem? (IRL 3)
- Why is it better than the current solutions? (IRL 4)
- Are you able to build a project to demonstrate the solution? (IRL 4)
- What customer feedback do you have? (IRL 5)
- Have you determined how much a customer will pay to solve this problem? (IRL 6)
Depending on the answers to these questions, you will determine if the startup has something that is interesting, if they service a large enough market and if they understand what needs to be done to solve the problem and at what price point.
If you are reviewing a pitch deck as a corporate then you should be able to assess the answers to these questions in terms of what your company currently does, where the industry is heading and what the company strategy is.
Are we there yet?
The next step is to evaluate the founding team and the startup capacity to execute. Essentially this boils down to an assessment of ‘do they have what it takes to succeed’?
This is a very subjective question but is crucial to determine if the startup is one that you want to take the time to work with?
We use a number of different techniques to come to this assessment, but some pointers are:
- Founder(s) relevant background and experience, personalities
- Why this startup? Problem? Market?
- Do they have the passion to succeed?
- Who has joined the core team and why?
- Does the startup have the range of skills, knowledge and experience required?
- What advisors, investors or mentors do they have?
- What is the immediate plan — next steps and are they logical?
- What resources do they have?
Takeaway For Corporates
To ensure that you are not wasting resources reviewing hundreds of startups across the business, it is important to have a clear process of reviewing startup approaches and to have an effective way to evaluate them. Simply, act like a VC!
Firstly, understand what areas within your company are seeking early stage innovation and only review those startups that meet the defined need.
Secondly, understand your company’s capability to engage with early stage startups, how many projects you can run, what budget you have and if you have the processes and frameworks in place so that you can manage the risk.
Thirdly, ask the startup to send in their pitch deck before you meet with them — ideally their investor deck, rather than a customer presentation. Review the pitch deck and only take meetings with those who meet your criteria and who can demonstrate their level of TRL and IRL maturity.
We recommend that you only engage with those startups who are at a TRL and IRL that match your criteria. If a startup is at a low IRL, for example, it may not have a sufficiently developed product for you to test with your internal or external customers. It is best to avoid startups who are at low maturity levels, unless you have built the processes to work with them.
Finally, seek to determine if the team is compatible with your organisation: its working style, timeframes, culture and the internal resources to service your needs.
It is our recommendation that a fully developed startup evaluation process is crucial to any organisation seeking to engage with outside startups. Without such a process, random interactions based on incomplete information and without clear objectives is unlikely to produce any tangible results.
If you need help with assessing startups or developing your own processes please feel free to contact me.
Trevor Townsend
CEO, Startupbootcamp Australia
