Startup Scouting is the act of discovering and evaluating early-stage Startups with the potential to become highly successful businesses. As an investor, entrepreneur or even just someone fascinated by new innovations, startup scouting can help you spot the next big thing before the rest of the world catches on.

But how exactly do you go about finding promising startups amidst the noise? Where should you look and what should you look for when assessing startups to invest in or partner with? Let’s break it down step-by-step.

Why Scout Startups?

Here are the key reasons organizations and individuals prioritize scouting emerging startups:

• Investment Opportunities – VCs and angel investors rely on scouting to source promising startups to fund early on. Getting in early leads to higher returns.
• Market Intelligence – Large companies scout startups to understand where their industry is heading. This guides their product and partnership strategies.
• Talent Pipeline – Startup talent today becomes industry leaders tomorrow. Scouting exposes recruiters to skilled candidates before the competition.
• Innovation Fuel – Startups pioneer all kinds of new technologies, business models and user experiences. Scouting sparks creative thinking.
• Network Growth – Scouting expands your professional network. Young startups you engage with may grow into hugely valuable connections.
• Personal Passion – Many startup scouts simply love the thrill of discovering the next big thing before anyone else.

Who is Startup Scouting for?

Here are some of the key groups that engage in startup scouting:

Venture Capitalists

VCs are always on the lookout for promising startups to invest in. By scouting early, they can identify and fund potential unicorn startups before valuation skyrockets. This allows them to multiply returns.

Angel Investors

Angels scout startups to identify promising opportunities to invest smaller amounts at an early stage. Getting in early allows them to get equity cheaply before valuations rise in future funding rounds.

Corporates

Large corporates scout startups to identify acquisition targets, technology partners and strategic investments to stay innovative and ahead of disruption. Startup acquisitions also bring in talent and new capabilities.

Accelerators/Incubators

Accelerators are startup talent scouts. They review thousands of early stage startups to identify the top prospects to fund and mentor through their rapid growth programs.

Startup Founders

Startup founders scout other startups for partnership opportunities, to be aware of competing products, and for potential acquihire of talented teams.

Service Providers

Lawyers, HR firms, PR agencies, and other startup service providers scout young startups to sign them on as clients early before heavy competition.

Media

Startup-focused media scout emerging startups to cover as they grow. Getting in early allows them to establish mindshare and build audience loyalty.

Recruiters

Talent recruiters scout fast-growing startups to connect them to in-demand experts like engineers, designers, product managers, and marketers.

Government

Government startup scouts identify innovative companies to support through research grants, subsidies, and special incentives.

Universities

Universities scout startups working on cutting-edge research with commercial potential for collaboration opportunities.

Where to Look for Early-Stage Startups

Finding startups before they hit it big requires tapping into the right networks. Here are some of the best places to spot startups early:

Accelerators and Incubators

Accelerators like Y Combinator and 500 Startups nurture hundreds of startups per batch, fast-tracking the most promising. Checking demo days is a goldmine for startup scouting. Incubators like AngelPad and Techstars also house interesting startups.

University Tech Transfers

Research labs in academia regularly spin off innovative startups to commercialize new IPs. Scouting university tech transfers uncovers exciting new technologies before they make a splash.

Coworking Spaces

Shared workspaces like WeWork house a variety of early-stage startups across sectors. Coworking events and networking opportunities are great places to meet founders and learn about emerging companies.

AngelList

This platform lets startups connect with and raise money from angel investors. Browsing startups by vertical provides a window into rising stars across industries.

Pitch Competitions

Startup battle events like TechCrunch Disrupt feature exciting new startups competing for attention and investment. Attending pitch nights at accelerators and incubators also provides startup scouting opportunities.

GitHub and ProductHunt

Checking out trending projects on Github and ProductHunt points to promising startups building new tech and products. The active comment sections provide useful insights.

Coworking Spaces

Shared workspaces like WeWork house a variety of early-stage startups across sectors. Coworking events and networking opportunities are great places to meet founders and learn about emerging companies.

LinkedIn

Joining startup and founder groups on LinkedIn provides visibility into new companies getting traction. You can also search for startups and reach out to founders directly.

Startup Databases

Startup databases like Tracxn track emerging startups globally across sectors, investors, acquisitions, and more. Paid versions provide more robust search and filtering.

Angel Investment Communities

Active angel investor groups like AngelList Syndicates, Gust, and AngelMD connect angels to interesting early-stage deal flow. This provides a window into promising startups.

How to Assess Startup Potential

Once you’ve identified early-stage startups, how do you evaluate their potential and filter out the weak from the exceptional? Use these criteria:

1. Innovation

Does the startup’s product or technology really push the envelope or disrupt an industry? Truly innovative startups solve problems in clever new ways.

2. Timing

Does the startup address a need in the market that’s rapidly growing and reaching an inflection point? Timing is everything.

3. Traction

Look for traction metrics like month-over-month user/revenue growth, low churn and repeat customer rates to gauge product-market fit. Hockey-stick growth trajectory points to winning potential.

4. Team

An A+ founding team can make or break a startup’s success. Look for technical excellence, domain expertise, previous exits and top school pedigrees. But also assess grit and coachability.

5. Competition

Thriving competition validates the market but also makes differentiation tough. Evaluate both strengths of competitors and the startup’s unique value proposition.

6. Business Model

Analyze the startup’s monetization strategy, cost structure and path to profitability. Room for scalability is a big plus.

7. Virality Potential

Can the product sustainably spread through word-of-mouth and user networks? Contagious distribution like Dropbox storage referrals can turbocharge growth.

8. VC Buzz

If top-tier VCs are excited about the startup, pay attention. They are smart about spotting winners early with access to the best deals.

Scouting Startups effectively

Scouting startups is part art, part science. You need a finger on the pulse of industry trends and consumer needs. But you also require the instincts to sniff out founders with the grit, vision, and expertise to achieve success. I share my approach to scouting below, along with tips to refine your evaluation skills. Master these and you’ll have a knack for discovering those rare startups with the potential to transform entire sectors.

Track Emerging Technologies

Keep pace with emerging technologies by studying industry analysis and reports. Attend tech conferences and events. Follow thought leaders on social media. Join targeted LinkedIn groups and Slack communities. This environmental scanning helps you spot holes in the market that new technologies could fill.

For instance, the proliferation of AI, 5G, and edge computing is creating opportunities in areas like:

• Autonomous vehicles
• Smart cities
• Remote medicine
• Supply chain optimization

When you encounter an emerging technology with multiple applications, make note. This increases the chance of finding a compelling startup in one of those domains.

Evaluate Market Forces

Technological feasibility alone won’t make a startup successful. You need to analyze the market landscape surrounding a given idea.

• Is demand present and growing for this type of offering?
• What competing solutions exist?
• Does this startup have a plausible strategy for capturing market share?

For example, after smart speakers became mainstream in homes, startups creating voice-powered apps and services saw a major opportunity. The market forces aligned in their favor.

Research the competitive dynamics thoroughly before determining if a startup has potential. Use tools like Google Trends, Gartner Hype Cycles, and CB Insights’ Reports to inform your analysis.

Assess Team Capabilities

Ideas are only as good as the team executing them. When evaluating startups, look beyond the surface level of the vision/product. Scrutinize the founders and their capabilities.

Do they have directly relevant backgrounds and experience? Successfully built companies and teams before? A track record of effective execution? Deep networks in the industry? These qualities improve the odds of a startup gaining traction.

For technical products, ensure the founders and early employees have robust engineering chops. They’ll need to build and iterate the MVP quickly. Business leads should exhibit analytical rigor and marketing savvy to identify product/market fit and scale adoption.

The teams I’ve seen succeed have a healthy mix of these capabilities coupled with raw drive and resilience.

Gauge Startup Runway

No matter how talented the team or compelling the idea, a startup needs enough capital runway to achieve lift off. Many flame out simply due to lack of funds.

When reviewing early stage startups estimate their runway by looking at 3 key factors:

1. Cash In The Bank – How much funding have they raised to date? Subtract their monthly burn rate to determine how long their money might last.

2. Milestones To Revenue – How far are they from monetization? Do they have clear milestones for getting to market and earning revenue? Longer timelines mean more required capital.

3. Investor Interest – Are reputable investors engaged and excited about the company? If so, future fundraising has a higher probability of success. If not, access to capital may dry up quickly.

Runway length can make or break a startup. If their funding seems sufficient to hit critical milestones, it’s a positive sign.

Verify Product/Market Fit

Ideas and prototypes are nice, but traction is what matters. To evaluate startups effectively, you must dig into metrics that demonstrate product/market fit.

• How quickly are they acquiring users or customers?
• What is the engagement with their product?
• How does their traction compare to competitive offerings?

Startups may also share revenue growth, Net Promoter Scores (NPS), churn rates, or other relevant KPIs. The more impressive their early traction, the better the odds the startup gains momentum.

Beware vanity metrics that sound flashy but lack substance. Seek cold, hard proof that customers urgently want the product.

Stress Test Business Model

A startup can gain initial users with the right product and some hustle. But building a thriving business is much harder. You need a model that can profitably scale.

When evaluating startups, pressure test their business model across a few dimensions:

• Unit Economics – Are margins healthy on each customer? Can they achieve profitability?
• Go-To-Market – Is their GTM strategy capital efficient?
• Defensibility – What competitive moats do they possess?
• Scalability – Are systems and operations designed to handle rapid growth?

A beautiful prototype means little without a solid business model behind it. Be wary here. Focus on startups demonstrating ingenuity in how they create, deliver, and capture value.

Trust Your Gut

Even experienced startup scouts can’t predict success with certainty. There are too many external variables and unknowns.

When the data is fuzzy, listen to your intuition. Does the startup’s story make logical sense? Do the founders display grit, passion, and integrity? Could you work alongside them for years?

Some of my smartest startup investments seemed illogical on paper. But I trusted my gut and my assessment of the people involved. Those gut calls often prove right.

Adapt For Changing Conditions

Finally, recognize that startup scouting requires constant learning and adaptation. The market evolves. New technologies and business models emerge.

Revisit your evaluation frameworks frequently. Adjust them based on new insights and observations. Strive to improve your pattern recognition abilities over time.

Becoming a Professional Startup Scout

For some, being an exceptional startup scout becomes a full-time pursuit and career. Here are tips if you aspire to go pro:

Start as a Side Hustle

Don’t quit your day job initially. Build scouting skills during nights and weekends to gain experience before diving in full-time.

Set Specific Goals

What do you hope to achieve via scouting – investment deal flow? Industry foresight? Talent pipeline? Define your objectives so you can focus efforts.

Build Domain Expertise

Master your chosen focus areas and technologies. Immerse yourself completely. Follow industry veterans.

Develop Methodology

Craft a repeatable step-by-step methodology for finding, vetting, engaging, and tracking startups. Continuously improve it.

Network Relentlessly

Knowing the right people is everything in scouting. Attend events constantly and build authentic relationships. Leverage LinkedIn.

Start a Blog/Newsletter

Publish startup scouting insights to attract an audience. Build your reputation. Aim to be known as a thought leader.

Join an Organization

Get hired by a VC firm, accelerator, or corporation where scouting aligns with broader initiatives. Learn best practices.

Consider Specializing

Become an expert scout for healthcare startups, climate tech, supply chain – a niche area with demand.

Monetize Your Expertise

Once established, offer scouting as a service. Consult, advise startups, run reports for clients.

With deliberate practice and persistence, you can turn startup scouting into a fulfilling career. Identify your motivations and commit fully to build expertise and gain exposure.

Playing the Long Game

Once you’ve identified high-potential startups to invest in or partner with, remember that timing is everything. Have patience and work with the founders through the ups and downs of the startup journey.

Many of today’s giants like Slack, Twilio and Stripe were once tiny startups with promising ideas but lots of challenges in their early days. With long-term mentorship and nurturing, they were able to realize their full potential.

Startup scouting is like a treasure hunt. It takes diligence and savvy to find hidden gems early. But uncovering and supporting the next generation of transformative startups can be extremely rewarding, both financially and in terms of giving back.

Happy scouting! Let the hunt for the next unicorn begin…

The post Startup Scouting: How to Find the Next Big Thing appeared first on Tactyqal.