Opinion, Berkeley Blogs

Is This Startup Ready for Investment?

By Steve Blank

Since 2005 startup accelerators have provided cohorts of startups with mentoring, pitch practice and product focus. However, accelerator Demo Days are a combination of graduation ceremony and pitch contest, with the uncomfortable feel of a swimsuit competition. Other than Ill know it when I see it, theres no formal way for an investor attending Demo Day to assess project maturity or quantify risks. Other than measuring engineering progress, theres no standard language to communicate progress.

Corporations running internal incubators face many of the same selection issues as startup investors, plus they must grapple with the issues of integrating new ideas into existing P&L-driven functions or business units.

Whats been missing for everyone is:

    a common language for investors to communicate objectives to startups

    a languagecorporate innovation groups can use tocommunicate to business units and finance

    data that investors, accelerators and incubators can use to inform selection

    While it doesnt eliminate great investor judgment, pattern recognition skills and mentoring, weve developed anInvestment Readiness Leveltool that fills in these missing pieces.


    Investment Readiness Level (IRL)for Corporations and Investors

    The startups in our Lean LaunchPad classes and the NSF I-Corps incubator useLaunchPad Centralto collect a continuous stream of data across all the teams. Over 10 weeks each team gets out of the building talking to 100 customers totest their hypothesesacross all 9 boxes in the business model canvas.

    We track each teams progress as they test their business model hypotheses. We collect the complete narrative of what they discovered talking to customers as well as aggregate interviews, hypotheses to test, invalidated hypotheses and mentor and instructor engagements. This data gives innovation managers and investors a feel for theevidence and trajectoryof the cohort as a whole and a top-level view of each teams progress. The software rolls all the data into anInvestment Readiness Levelscore.

    (Take a quick read ofthe poston the Investment Readiness Level its short. Or watch the videohere.)

    The Power of the Investment Readiness Level:Different Metrics for Different Industry Segments

    Recently we ran aLean LaunchPad for Life Sciencesclasswith 26 teams of clinicians and researchers at UCSF. The teams developed businesses in 4 different areas therapeutics, diagnostics, medical devices and digital health. To understand the power of this tool, look at how the VC overseeing each market segment modified the Investment Readiness Level so that itreflected metrics relevant to their particular industry.

    Medical Devices

    Allan Mayof Life Science Angelsmodified the standard Investment Readiness Level to include metrics that were specific for medical device startups. These included; identification of a compelling clinical need, large enough market, intellectual property, regulatory issues, and reimbursement, and whether there was a plausible exit.

    In the pictures below, note that all the thermometers are visual proxies for the more detailed evaluation criteria that lie behind them.

    Device IRL

    You can watch the entire presentationhere


    Karl Handelsmanof CMEA Capitalmodified the standard Investment Readiness Level (IRL) for teams developing therapeutics to include identifying clinical problems, and agreeing on a timeline to pre-clinical and clinical data, cost and value of data points,what quality data to deliver to a company, and building a Key Opinion Leader (KOL) network. The heart of thetherapeutics IRL also required Proof of relevance was there a path to revenues fully articulated, an operational plan defined. Finally, did the team understand the key therapeutic liabilities, have data proving on-target activity and evidence of a therapeutic effect.

    Therapeutics IRL

    You can see the entire presentationhere

    Digital Health

    For teams developing Digital Health solutions,Abhas Gupta of MDVnoted that the Investment Readiness Level was closest to the standard web/mobile/cloud model with the addition of reimbursement and technical validation.

    Digital Health


    Todd Morrillwanted teams developing Diagnostics to have a reimbursement strategy fully documented, the necessary IP in place, regulation and technical validation (clinical trial) regime understood and described and the cost structure and financing needs well documented.

    Diagnostics IRL

    You can see the entire presentationhere

    For their final presentations, each team explained how they tested and validated their business model (value proposition, customer segment, channel, customer relationships, revenue, costs, activities, resources and partners.)But they alsoscored themselves usingtheInvestment Readiness Levelcriteria for their market. Afterthe teams reported the results of their self-evaluation, the VCs then told them how they actually scored. We were fascinated to see thatthe team scores and the VC scores were almost the same.

    Lessons Learned

      The Investment Readiness Level provides a how are we doing set of metrics

      It also creates a common language and metrics that investors, corporate innovation groups and entrepreneurs can share

      Its flexible enough to be modified for industry-specificbusiness models

      Its part of a much larger suite of tools for those who manage corporate innovation, accelerators and incubators

      P.S. if you want to learn more abut the IRL and other tools,we teach a 2-day class for corporate innovation, accelerators and incubators. Infohere