You’re looking for companies that have evidence of a strong value proposition.
They have validated through initial customer traction that they are solving the customer’s problem and that they are significantly and quantifiably better than their competition.
Common questions you should consider asking in due diligence:
Team’s ability to grow:
Many companies who make it to this stage are able to sell a product or service at a small scale but have difficulty managing growth. Make sure they explain how the team has a clear understanding of how the market operates. What are sales cycles like (and how long are they)? What are the technical product and development skills they need to grow (and who on the team has them?) What are market comparables, and how are they better?
What is your differentiation (at scale)?
Any charismatic team can sell something to somebody once–which you’ve likely already done. To grow, they need to quantify how they are 10x better than the competition. Are they 10x cheaper–and how? Are they 10x faster–and how do you measure that? Do customers like them 10x more–and how do they know? Push them to put numbers to their claims of being better, faster, cheaper, etc.
What’s your market size?
Can they explain how their market is big enough to justify investment? (If they are raising venture capital-style equity, the market likely needs to be $1B+).
Where you can add the most value to entrepreneurs at this stage:
At this point the team should have a fully functional product. Have they gotten feedback about the user experience? Encourage them to solve any user issues as quickly as possible and over deliver to their early adopters.
Focus on differentiation:
It’s not enough that the team can articulate its differentiation – it needs to show it through validated sales with real customers. Work with them to get early customer traction on differentiation as quickly as possible – ballpark numbers are 100 customers for B2C and 5 customers for B2B companies.