When I evaluate startup investment opportunities, I usually don’t pay too much attention to what industry the startup is in. Great startups can come from any industry. So the first thing I look at is traction. Traction usually means there’s some revenue coming in. But in some cases, it can mean other things.

When evaluating social media companies, for example, there usually isn’t much revenue at first. Most social media startups focus on getting as many users as possible during their early years. In cases like these, it’s important to look at active users, rather than total users.

My point is, the first question we should be asking when looking at a deal is this: How much progress has the company made since launch?

One way to measure that (assuming the company has revenue) is to look at its sales graph. How fast is it growing? What catalysts for growth are there?

Good founders will be upfront about these numbers and present them clearly. If a startup doesn’t provide sales and growth details, it could be a bad sign. If the investment opportunity is on an equity crowdfunding site, you can examine the financials in more detail by reading over the Form C filed with the Securities and Exchange Commission. And the form shouldn’t be too hard to find. Every equity crowdfunding deal in the U.S should include a Form C link.

The second thing I look at is how much money the company has raised previously – and how much traction it picked up relative to the money raised. In the early stages, traction doesn’t have to yield a ton of money. As long as the revenue is dependable and growing quickly, the startup is likely in good shape.

I particularly like startups that have managed to get significant traction without raising outside money. These “bootstrapped” startups with great traction don’t come along often. But when they do, I always take a closer look – and often invest.

And because bootstrapped startups with traction are so rare, I also invest in more unproven startups if the idea is good enough – and if the potential payoff is big enough.

Digging In

If the company looks promising based on its traction and capital efficiency, I start digging deeper. I carefully read over the deal page, which should have most of the information you need to make a decision. I make sure I look at the startup’s slide deck (if it has one). I check out the company’s website. And I search on Google, YouTube and social media sites. You can often find interesting nuggets of information that the company doesn’t highlight in these places.

For equity crowdfunding deals, there is always a Q&A (discussion) section where potential investors can ask founders any question they want. And all of these discussions are publicly viewable, so it’s a terrific resource. Here are some things I think about when reviewing the Q&A section…

  • When the founders answer a question, are they respectful?
  • Do they respond quickly?
  • How well do they answer questions?
  • Do they dodge certain questions? Why?

The Q&A feature is unique to equity crowdfunding (deals that are open to all investors). If you’re considering investing in an equity crowdfunding deal, definitely take the time to review this section. It is your best shot at getting to know the founders. How they field questions from potential investors can tell you a lot about the company.

Possible Red Flags

Over the past six years, I’ve reviewed thousands of online startup deals. Here are two of the lessons I’ve learned along the way…

  1. If the deal page mostly focuses on how great the sector or industry is, beware. The focus of the deal page should be about why this specific startup is great, not about why the industry is. We want to invest in startups because they’re great companies. Being in a great industry can help, but it also means competition is likely to be fierce.
  2. Pay attention to when the startup was founded. Generally speaking, the longer it’s been around without making major progress, the greater the risk. If a company has been around a few years and still doesn’t have significant revenue or traction, it’s often not worth investing in. Ask yourself: Why now? What’s changed?

Now get out there and look at some deals. Here’s a list of equity crowdfunding sites to get started…