Category: Venture Capital

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Venture Capital

Investing criteria: Can this company produce a +$1B exit?

This year, one of the things that I managed to do was to structure the way I evaluate a company – for investment, partnership or even as a potential employer. This investing criteria framework is a quick way to decide if it’s worth putting money in a company or not, based on a $1B exit goal.

The Investment Criteria

  • Strong Founding Team
  • Team diversity and size
  • Traction / Interest
  • Market size and size of pain
  • Investor signaling, valuation velocity
  • Timing

The Example Startups

  • Mux – video streaming API tool
  • PolicyGenius – insure-tech comparison marketplace
  • CrowdAI – data preparation for computer vision
  • Chatdesk – eCommerce customer support tool

Strong founding team

I look for signaling here – accelerators, incubators, good schools and diverse backgrounds. This de-risks some of you selection bias, since they have been through filtering before. You want to make sure the team is complementary enough and that they get along well. Serial entrepreneurs with successful exits are great, too, since they have provided investor returns before. I also look for relevant go-to-market experience and in-market expertise, when looking at founding teams, to ensure they are able to execute not just the product part, but the distribution.

Mux: YC, Brightcove alums, serial entrepreneur, team worked together before. Strong industry experience

PolicyGenius: Diverse founding team, ex-McKinsey, worked together previously, ex-Harvard educated

CrowdAI: Two people ex-Google, one of the founders had a minor exit in AdTech.

Chatdesk: ex-Google, McKinsey, Vanguard founders, but lacking go to market key people

Team diversity and size

This first investing criteria is important regardless of the size. More diverse teams produce better results in the long run, so going beyond the white male group is important for my investment criteria. I look at both the founding team and their early employees. LinkedIn is a good way to empirically test this, but Crunchbase has started adding diversity signals too.

Mux: Diverse team, but only white male founders. 61 team members to date, gender diversity in the engineering team. Good industry experience for most team members

PolicyGenius: Gender diverse teams, large organization, focus on people and operations, 395 people and growing

CrowdAI: Diverse founding team – gender, ethnicity; small team (20), mostly male; not significant industry experience i.e. strategy person coming from oil and gas

Chatdesk: Diverse founders and team – gender and ethnicity, global operations, strong data science backgrounds. Small team (26). Very little Go-to-market staff headcount and lack of industry experience

Traction / Interest

This is where the evaluation depends stage-by-stage, company-by-company and industry-by-industry. If there are visible signs of paying customers, like logos on the website, and notable case studies, then that’s always a great sign. I also try to look at their web traffic, trends, industry keywords where they show up via SEO, and signs of an active community – on Twitter, Discord, Github, LinkedIn, or any other platform. No activity, especially for community-dependent products, is a red flag.

Mux: Customers like Vimeo, TED, Udemy, Wistia, Reddit, Fox, Robinhood, Scale, Equinox, Amazon as channel partner; 140,000 visitors/month on their website, strong growth month over month, hot industry (API-based)

PolicyGenius: 1.2M visitors / month, over 50% US (core target market); new partnership announcements with the likes of Brighthouse Financial

CrowdAI: Low traffic, low time on site, high bounce rate, no marquee customers

Chatdesk: 13k/visitors per month, but mostly non-US, US traffic accounting for 20%. US growth in traffic recently (4x), a few niche customers in the ecommerce space on their website, as well as case studies, large number of integrations with existing support tools. AI powered

Market size / Size of the pain

Usually, if startups get this far down the decision making path, then they are on to something. But even if they have a great product, team and traction, the market might not be big enough for a $1B exit to happen. Or if the market is big, but the pain is not real – a nice to have vs a must have product, then they aren’t likely to grow into something huge. Competition is a good sign here, if they are able to differentiate and serve the pain in a more efficient, compelling or interesting way. If the product is actually a feature that most people in the target market can live without, then it’s safer to pass.

Mux: +$40B market size for streaming alone, and growing with COVID19 pushing people to rely on video for almost all interactions; Streaming is expensive and their pay-per-use system works for teams big and small

PolicyGenius: +$1 trillion market size in the US alone, hugely outdated and cartel-y; A few key competitors, like Lemonade, which recently went public. Large pain

CrowdAI: Large market (+$25B by 2025), big pain with computer vision being used more and more across all industries, and tech-assisted data labeling being a critical path to growth

Chatdesk: $73B market for customer service automation tools, however incredibly crowded and little differentiation among players. Relatively small impact doesn’t alleviate the customer service pain.

Investor signaling, valuation velocity

Again, this is stage dependent, and if you’re looking at this, then that means the previous hurdles were a pass. If I still have doubts about the market/traction/product/team, then this filter is pointless. When I look at investor signaling and valuation velocity (assuming there were a few funding rounds before the evaluation), I look for top tier VCs/Accelerators/Angels that put money into the company, are advisors. I also look for a stage-to-stage 2x valuation increase, or more. There are industries where valuations will lag early on and then as the company gains more traction, they shoot up. But if you see anything north of 2x round over round, then it’s a good sign.

Mux: Just closed a series C for $37M, with a total of $68.9M to date, with big names like A16Z, Accel joining Susa Ventures in later rounds. PE backing through a TPG Growth arm in Series B round; Valuation in the late tens of millions, early hundreds of millions.

PolicyGenius: 20 investors to date, $161M raised at triple digit millions valuation, including PE backing, signaling potential profitability, on route to unicorn status, strong traction for growth

CrowdAI: Only $2.1M raised to date in 4 years, small team, implied slow growth

Chatdesk: Only 2 funding rounds to date in 3 years, $2M raised, implied slow growth, small team

Timing Criteria

Last but not least, are they starting the company at the right time? Is there enough critical mass, infrastructure, capital, customer appetite to generate growth? This one is harder to quantify and it requires you, as an investor, to look at the market and try to understand its dynamics. Where is it on the Gartner Hype Cycle? Is there even analyst coverage for this sector? What signals can you read from key players?

Mux: Founded in 2016, they are positioned to grow with the COVID19 video tailwind, and have landed sufficient traction to attract even the most picky buyers. Their usage-based, AWS-style pricing model makes sense and they are well positioned to grow

PolicyGenius: Started ahead of the game in 2014, and now benefiting from insurance-tech adoption tailwind and positive COVID19 impact due to people moving away from brick and mortar agents

CrowdAI: Early to market in 2016, but didn’t scale fast enough, and are now being overtaken by competitors.

Chatdesk: Late to market, with a lot of customer service automation hype already captured by Salesforce Einstein and IBM Watson in 2016-2017.

Final verdict for Example Startups

Mux: High unicorn potential.

PolicyGenius: High unicorn potential.

CrowdAI: Low unicorn potential.

Chatdesk: Low unicorn potential.

So far, these investing criteria filters have proven useful for my angel investing and advisory engagements. I’m always looking to improve them, so if I missed any other criteria that you found useful, comment below. I’d love to listen to other perspectives on this.

Photo by De’Andre Bush on Unsplash

Categories
Venture Capital

Top US universities are VC institutional partners

I tried sharing this story directly on LinkedIn, but it didn’t work, so I’m posting it here.

If you didn’t graduate from a top 5 school and wonder why top VCs are primarily funding certain types grads, then here’s a story for you.

Elena, who recently launched a really cool resume and career coaching service called Inner Stories, is reading a book called “Alpha Girls“, about women in the VC world from back in the 80s-90s. One of the things she shared with me is that Accel, named in the book, had Harvard University, Massachusetts Institute of Technology & Princeton University as institutional investors.

Think about it. That way, they are 2x incentivized to fund their graduates. Looking at funding patterns, it’s now starting to make sense how the system works over here. Here’s an extra article outlining how the university endowment funds ended up boycotting Accel’s VC fund fees in 2001, and other interesting tidbits of VC history.

So the money you pay for that Harvard tuition might end up on your cap table at seed or Series A, if you graduate and start a company. Not a bad deal for students. Not great for diversity, though, and opening up the funding circle.

Photo by Nathan Dumlao on Unsplash

Categories
Venture Capital

My investment thesis

I realized I joined Republic in early 2018, and I have used that time to invest in a few of companies. This was just one of the ways I managed to beat the accredited investor limitation in the US, which keeps less wealthy people from gaining wealth as fast as rich people.

Between now and then, I have tried to form an educated opinion on every company that I was interested in from an investment perspective and I wanted to formalize that in this article. I talked with a more experienced investor lately and he mentioned how writing down your investment thesis will keep you accountable and focused.

I can definitely see that happening, since one can get distracted by a great pitch and ignore certain points, if you don’t have a clear list.

So here are my criteria for my next few years of investing:

  • invest in what I know: marketing technology, artificial intelligence practical applications, customer experience technology, blockchain technology, fintech
  • invest in strong founding teams: vetted backgrounds, big-tech alumni, serial entrepreneurs, track record for success; AND/OR great to work with, smart, driven, resourceful, growth mindset (if it’s meaningful enough to get involved personally)
  • look for traction or early interest: they have already some paying customers, there is a long waitlist for their product/service, people are willing to use their app, any kind of proof that they are on to something
  • the market size is meaningful: they are not limited to local geos, the vision is to address a global market and scale massively; minimum TAM of $10B in 5 years and growing
  • investor signaling: if someone wealthier, more experienced than me (a.k.a. top tier accelerators, angels, VCs) already risked early money with them, then I’m more likely to consider investing.

This list is likely to evolve, as I get more experience in the space, so I welcome any suggestions, ideas or feedback!

Photo by Lily Zhou on Unsplash

Categories
Politics Startups Venture Capital

“I’m sorry I’m not rich enough to try to get rich”: Accredited Investor status in the US

I’m getting ready to invest my first real money into a company and a team I believe in a lot. I’ve dabbled in venture capital with Republic and with ICOs, but up until now my tickets have been small, like money you would spend on a trip or a nicer dinner.

I wanted to share my learnings from this process and show, in simple words, that non-accredited investors can get in on early stage ventures.

For those who don’t know, the US is probably one of the most protective countries when it comes to capital and investment. The Securities and Exchange Commission (SEC) regulates very strictly what investors and entrepreneurs can and can’t do when it comes to raising money, offering investment opportunities and funding.

Here’s the Investopedia definition of an accredited investor:

An accredited investor is a person or a business entity who is allowed to deal in securities that may not be registered with financial authorities. They are entitled to such privileged access if they satisfy one (or more) requirements regarding income, net worth, asset size, governance status or professional experience. The term is used by the SEC to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. 

Sometimes, these regulations feel like they are too strict.

For example, if you’re a high earning individual, with ample savings, a diversified portfolio of assets – stock, SAFE notes, real estate, REITs, private equity via JOBS act, that’s not enough to be qualified as an accredited investor.

To become accredited, you have to do one of the following:

  • have an income of more than $200,000/year (single) or $300,000 (married, filing jointly) for two years in a row
  • have a net worth of over $1M (excluding your primary residence)

While I understand some people might need to be protected from themselves, and be stopped from investing in scams / con artists, I can’t understand why the thresholds are so strict. If you make $190,000 / $290,000 or are worth $900,000, you still don’t qualify, even though by all means you can be as sophisticated, or even more sophisticated than someone who, for example, inherited most of their net worth that’s over $1M. That’s not really fair, is it?

Fortunately, the JOBS Act, more specifically Rule 506(b), allows companies to raise money from non-accredited investors, under special conditions, and with, in my opinion, normal disclosures, per the SEC:

If non-accredited investors are participating in the offering, the company conducting the offering:

– must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in registered offerings

– must give any non-accredited investors financial statement information specified in Rule 506 and

– should be available to answer questions from prospective purchasers who are non-accredited investors

Lawyers and inexperienced entrepreneurs will be reluctant to include non-accredited investors in funding rounds, but you can push back using these facts. The website I linked under the Rule 506(b) has more information on the type of offerings that companies can put forward and accept non-accredited investors on their cap table. It’s not impossible now, it’s just hard (still) to understand the rules.

So next time you want to invest and you get push back, instead of saying I’m sorry I’m not rich enough, refer people to the JOBS Act and the Rule 506(b). This way you can access early stage ventures and potentially make 100x returns. Or you can lose all your money, since early stage investing is extremely risky. But at least you have the freedom to choose.

Photo by You X Ventures on Unsplash

Categories
Startups Strategy Venture Capital

Take the meeting after doing due diligence for VC expertise

I wrote an extensive article on how to choose the right VC as a founder after a few very direct and intense experiences and significant research. Recently, I have been advising a few founders and one of the most important topic they bring up is raising money. They have to go out and talk to VCs all the time, if they want their startups to grow. Sure, they could build and scale organically, and kudos to the ones that do, but for deep tech, more often than not, you need deep investments.

The first rule of VC meetings as a founder should be: don’t meet everyone who wants to meet with you. It’s the same as reaching out to VCs, not all of them will want to talk to you. And that’s ok.

Let’s say you are in the fortunate position where VCs reach out to you and ask for meetings. This is the way I would structure the due diligence process from the founder/CEO perspective:

  • Does the VC have experience investing in the market(s) I’m building for or with customers I want to have?
  • Does the VC have successful exists or meaningful M&A activity?
  • Does the VC have partners that have specific, hands-on industry knowledge that can benefit my business? (n.b. hands-on can mean operator, but it can mean a good track record as a VC in that space)
  • If you are deep tech, does the VC have deep technical expertise – like for NLP, blockchain, biotech, self-driving cars, manufacturing etc.
  • Is the person who reached out / who I’m supposed to be meeting the right person in the VC to meet?
  • Does that person have deep experience in my space – industry and technology?
  • Do they agree to take a 15-30 min phone call to discuss their questions?
  • Do they ask the right questions during that call that reflect industry and tech expertise?

If even one of these is a no, then you would be better off passing the call. They might be fishing in the wrong pond or just gathering market intelligence. It won’t likely lead to you getting investment from them.

If this is useful, please share with your founder peers.

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Categories
Startups Venture Capital

How To Choose The Right Investors for Your Startup [with Examples]

I have been involved with startups for the past couple of years and one of the most frequent questions that came to both my mind and in entrepreneurship community discussions is how to choose an investor. This is a two sided question, as both you as an entrepreneur and the investor must find common ground on most things to share resources – their money & influence vs. your company and future success.

So for the entrepreneur, it’s a process of research, pitching and due diligence, while for the investor it’s a process of deal sourcing, evaluation, investor branding, network and due diligence. Both sides need to do a lot before any deal even begins to travel through the pipeline. Since I value the experience of others, I pulled the best advice from several online forums & communities to cover the top criteria on how investors and entrepreneurs choose eachother.

It’s very much like marriage – successful ones always are backed by lots of work, lots of getting to know eachother, bad ones are spontaneous and crazy.

Jason M. Lemkin said on Quora that the entrepreneur should focus on what they need according to the stage they are in. In the early days, you will look at:

  • Help scaling from nothing to something.  An investor who’s actually done what you’ve done for real can help you here 10,000,000x more than someone that hasn’t.
  • Help getting at least 1 great hire.  Can the investor help?  Hiring is always impossible.
  • Help with the next round.  This should not be underestimated.  Is the investor someone VCs like to follow?  For real?  And will he or she be able to help here?
  • Help with PR and promotion.  Most investors can’t do this.  But some can.  This can help.
  • Help making you seem Hot (or at least, Cool) before you deserve it.  Few can do this.  But it’s super valuable.
  • Help being a true mentor.  Related to the first point.  Very few can really do this.  But if you can get someone to really help you be a better CEO — this is worth its weight in gold.

Forbes.com, in a recent article, focuses on 4 key questions:

1. Do you click on a personal level?
2. What can they bring to the table?
3. What have they invested in before?
4. Do they usually do follow-on rounds?

While the first one is a no-brainer, given that you’ll be working together for several years, the second question is often overlooked when money shines bright. Look beyond the cash and check the points made by Jason Lemkin, check expertise, experience, network and resources. They will end up being more valuable than the cold, hard cash.

Here’s another great piece of advice from Entrepreneur.com backing what I just said:

Cohen: They should make introductions for you to other investors, customers and partners. They should be asking you what your issues are and how they can help. With my companies, if I know what your top three issues are on a regular basis, I’m happy.

Cnet.com had a piece about this from a few entrepreneurs that went through the successful investment process (the bold part is my choice):

“Pick investors who believe in you personally and who you feel you can be open with,” said Danielle Morrill, Referly co-founder and former director of marketing for Twilio. She advises companies to find investors they can trust and won’t abandon a business when it’s going through rough times.

Sales-Griffin’s final note is that it should never be about the money. “The real value is in the regular hands-on advice and strategic support,” he concluded.

Christopher Mirabile said on Quora that not all investors are created equal and went on to name several categories of sins related to investor behaviour. Helps a lot to have a red flag checklist when going through the hoops, although I don’t agree with him on all the points or the severity of them. Here’s a selection:

Deal-breakers:

giving you bad advice and insisting you follow it
lacking, honesty, honor, integrity and good common sense values
being bigoted, sexist or likely to harass or disrupt members of your team
being unable to make up their mind on whether to invest (or what strategic course to take) and always wanting another meeting

Red flags:

insisting on a board seat but having no value to add
failing to understand or keep current with the company’s technology or positioning in order to represent the company well
not being able or willing to introduce you to other investors or customers, failing to actively support and “talk up” your company, having no network or connections or networking skills to help you build the team
lacking business fundamentals or experience with sales, taking a lot of your time and requiring a lot of hand-holding
insisting on dilutive advisory shares or consulting fees for no, or dubious, value
being unpleasant, close-minded, inflexible and generally difficult to get along with
lacking knowledge of how to structure a round, lacking knowledge of how to stage capital into a company

And last, but not the very less least, Mikko Asaarela put together a very comprehensive list of questions investors should be prepared and expect to be asked.

1. Could you refer me to entrepreneurs who you’ve worked with who highly recommend you?

2. How many Founders/CEOs have been fired by the board from your portfolio companies? Can I talk to them? 

3. How much return have the entrepreneurs seen from exits in your portfolio?

4. Can I talk to the founders of failed companies in your portfolio?

5. What kind of follow-on investment do you think the company needs to succeed?

6. What is your end game?

There is no quick win or recipe for success. Every company and every investor are different, so go through the process of getting to know each other, research online and offline, ask tough questions and work on your personal / investor brand beforehand. It helps speed up the whole thing.