Things we look for when investing?
One of the most common questions we are asked, is what we look for in a start-up when investing… this is a very personal and emotive topic and also risks exposing, our naivety when investing.. but here we go, why not just bare it all!?
First off it’s worth pointing out that our annual investment letters already give some insight into our evaluation criteria:
Is the problem in an area we understand, can evaluate and (potentially) and add value to?
Is the problem described a real one that needs to be solved?
Is the solution being pitched a possible and likely solution to the problem?
Is the founding team capable of executing on the solution and do we think we can work harmoniously with them to help them?
So it’s worth starting there if you are really interested to know our thought process.
Outside of what has already been written there, the following topics are also things we discuss:
Distribution - it has become quite clear to us that good ideas can fail if they have no easy / low friction way of ‘distributing’ the product to the ICP. This applies to both B2B and D2C businesses.
TBH this was partly inspired by Claire’s conversation with Sonali at Accel (so credit where it is due). If your:
SaaS is focused on large enterprise sales, then you face a very length sales cycle which will also require your company being of a certain size and stature to get through their procurement function. Unless you literally have a manadatory solution that no one larger has, you are facing a very uphill battle.
SaaS is focused on the SMB and you are totally dependnt on Google PPC or facebook ads, you.
App has no network effects, no rewarded referral model. If it is based on one-off hit and hope tiktok videos going viral, you are going to struggle.
We have come to the conclusion that you need not just a good idea, but also a great method of how you will distribute idea to the world (cheaply / quickly / in a scalable way).
Community - This is another idea inspired by someone else. Danny Rimer at Index Ventures really got us thinking about the community that the platform has around it.
This ties in very closely to ‘distribution’ and that if your product has built a community that is passionate about it aorund it, they effectively sell your product to others for you. In our portfolio, we have seen this with investments like SooperBooks, HomeFans, HomeCooks and Konvi, where the platforms either have users who tell other users to use the platform, or marketplaces where the users then become suppliers.
Monzo and their golden tickets are the perfect example of this.
Size of the Opportunity - Another area which we have been exploring a lot, is if the idea is large enough to justify venture investment. As an early stage angel we not only have to pick startups that will not fail, but when they work, we then face the struggle of dilution as the investment grows. We need to know that the investment has enough headroom to grow into a valuation that will allow us to exit with a healthy profit. After all, statistically, most investments are supposed to fail.
It is worth noting that there are many good startup ideas, that can be successful and absolutely have a roll in the ecosystem, but they should not be funded through the venture angel and should focus instead on slower bootstrapped growth and profitability, more akin to a PE type investment.
Potential Exit - This then links to the final thought around how would the investment exit and we as angels, get a return on our investment. i.e. who could buy this company (and would they) or could it be big enough to IPO. There are many good ideas in terms of being able to find users, but they will never be able to monetise materially and hence attract a decent exit. This in turn reduces our ability to get a return on our investment.
Note: Image generated using DeepAI with the text “a married couple exploring with a magnifying glass”
