What Are Venture Investors Even Looking For?
A team and a dream... 🤝💭🚀
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This Week in Startups
💰 Funding
TruckItIn, one of the many homegrown players digitising the freight and trucking industry, has raised a $13m seed round led by GFC and Fatima Gobi with participation from a range of regional investors.
OlaDoc raised a $1.8m pre-series A led by Sarmaycar Ventures. While this should’ve been covered in the last issue, I decided to add it here as I see healthcare being one of the key industries where funding will pick up in 2022.
📚 Reading
As usual, the team at TechShaw is posting regularly and is a great source of insight - check out the range of newsletters here.
🎧 Listening
Zahid Lilani’s Misaal podcast has had two new guests since the last newsletter:
Hira Tariq, Founder of Sisterhood.pk, a fashion marketplace for pre-loved items.
Ahmar Awan, General Manager at TruckItIn.
📺 Watching
PakLaunch fireside chat with Mamoon Hamid, partner at Kleiner Perkins - one of the pre-eminent global venture funds and hosted by Kalsoom Lakhani of i2i Ventures.
What Are Venture Investors Even Looking For?
It’s complicated. It’s very complicated. It can depend on the type of investor, their fund strategy, their asset allocation mix, where they’re investing, when they’re investing, the industries they’re investing in etc. etc. The list goes on. However, for the purposes of this piece, I’ll be talking about venture funds investing in early-stage technology companies, especially in emerging markets with the hope that this can be helpful to founders, aspiring investors, and even those assessing employment opportunities in the tech ecosystem.
Ultimately, funds are assessing and underwriting investments across three domains:
📈 The business fundamentals
🏦 The market in which the business is being built
👩🏾💻 The team building the business
Investors might cut this in different ways, prioritise a team or idea, or have minimum requirements in one of the domains but all investors can agree that these three things are very important. This in and of itself is quite trivial but it does provide a framework through which we can begin to generate questions that funds are interested in.
I’d highly encourage anyone on either side of the venture table to go through this process whether you’re looking to break into venture capital or if you’re a startup founder looking to raise venture money. This process is even more important than, and should come before, the infamous pitch deck. More and more, founders are sharing ‘memos’ with potential investors which follow a similar process to this.
Finally, it’s important to note that these guidelines are by no means one size fits all. Investors who don’t fit this mould and instead take a different approach exist and should be considered.
Business
This section starts simple. What problem is your business solving? What is the process your users or customers go through today? What solutions exist or have been tried? Why didn’t they work? What exactly is your solution? Are there well-known companies you can compare yourself to better communicate your model? It might seem cliché to say Uber for X but if you’re a two-sided marketplace, that was once one of the best ways to communicate this.
This should go into enough detail for the reader to understand not only the business you’re in but also exactly where you fall in terms of the value chain. Make sure to define both who you are and who you are not for the sake of clarity. Always assume that the reader does not have any background in the industry but is highly intelligent. Outline processes and stakeholders and give context but don’t labor points.
Once you have a clear answer to these questions, you can move into your business model. How does your venture make money? Who pays for the product and how is pricing structured? Is revenue recurring or one-off? What are the sales cycles and engagement structures? At scale, is it clear that there will be a path to positive EBITDA margins? In other words, at scale, can you be a profitable business? In emerging markets in particular, is the potential growth and eventual profitability enough to tackle currency devaluation and go above and beyond to deliver expected investor returns?
The purpose of these questions is to translate the business into digestible numbers. Ultimately venture investors are in the business of multiplying money. The only real way they can do this is by assessing and projecting cash flows and allocating their money where they believe they can maximise these. At the earliest stage, these calculations are often done informally or ‘back of the envelope’ but in emerging markets and for new models, this could take some convincing.
Finally, how far have you gotten towards building this vision? Do you have revenue, customers, profitability, licenses? Ultimately, the best indicator is revenue and its growth. But depending on the industry different metrics can be relevant from GMV (Gross Merchandise Value) for marketplaces to GTV (Gross Transaction Volume) for payment processing plays. Make sure you know exactly which metrics investors care about in your industry. These will often be quoted in larger companies’ press releases. Get an idea of what good looks likes, track it, and pursue it relentlessly.
Always make sure to contextualise progress i.e. in just three months we have secured key distribution agreements with 5 of the 10 biggest distributors in the country. One interesting approach is to show what competitors did in a certain time period and show what you have been able to do in a lesser time period. Of course, this approach only works if you’ve got something to back claims up with.
By the end of this section, readers should know what you do, how you make money, and how far you are in your journey. If you really understand your business, you should be able to do this in a single page of text with room to spare.
Market
What does the current market look like? Who is working to solve the same problem as you are? Don’t misinterpret this question. It’s easy to say no one is doing it exactly like you but it’s much harder to tackle this head-on and outline here’s where they do well and here’s where they falter. Remember, don’t ask who is doing the exact same process as me, ask who is solving the same problem as me. Uber’s competition is not just Lyft or Careem, it is Rickshaws, Buses, walking, or any other way to get from X to Y. In Pakistan today, for example, fintechs are not just competing with each other and with banks. They are also competing with cash. Providing an overview of the market is not particularly tough but understanding the nuances of competitor models is very important, even if that information isn’t necessarily communicated in this memo.
The most important question, in a market like Pakistan, is whether the market is big enough to justify the return profile? And is the market big enough for multiple winners? Here, the most relevant concept is that of TAM which refers to a total addressable market. It’s easy to say that Pakistan has 220m people and they are each potential customers with potential average revenue. This is useless to investors, and honestly, if the discussion doesn’t go beyond this, it’s a huge red flag. 🚩 🚩 🚩
A more substantive discussion occurs when you dig deeper. What is the real TAM of the business? Acceptable TAMs can vary but generally, an investor is looking for a billion-dollar company, or a unicorn and so would need a potential market with at least a billion dollars of revenue and normally growing fast. To grossly oversimplify things, if your market takes in a billion dollars today and you need a $100m revenue to justify a billion-dollar valuation then you need a 10% market share. You can judge how aggressive that might be by looking at incumbent market shares.
One important point to remember is that as your model evolves and you launch new products your TAM might increase. If you drive behaviour change this can be quite stark. Uber, in their original pitch decks, estimated a $4.2B market size and indicated that a best-case scenario was $1B in annual revenues. Fortune estimated that in 2020, ride-hailing in North America brought in $35B in bookings (revenue to drivers and ride-hailing players). In the full year of 2021, Uber made $5.6B in revenue with their international presence and UberEats. Your initial vision can really be outgrown. While it’s important to consider, very few businesses really will be the next Uber or Careem.
Here are some interesting recent discussions on the topic in Pakistan, check out some of the tweet replies for pointers. It’s also worth noting that the concept of a unicorn is a bit of a moving target. With increasing prices at earlier stage rounds, many investors are recalibrating and looking for even bigger wins.
Finally, in the market, investors in emerging markets, in particular, are keen to ask, how has this model played out elsewhere? There’s a reason why investors like X for Y. Where X is a unicorn and Y is new geography or region the original players haven’t touched. Emerging markets investors are theoretically swapping out business model risk for market risk. Make sure you know your global peers inside-out, try to speak with them directly and understand exactly how they work and how you might be able to leverage their learnings.
Team
Is the team well-placed to tackle this challenge? Do they have world-class educational and work experiences? Do they have ‘founder-market fit’, in other words, are they well-placed to tackle this specific problem? Amongst them, do they have at least one technical founder?
If you do have co-founders, it’s important that as a team you should be worth much more than a sum of your parts. Not only should each of you have spikes in some of the aforementioned questions, but it’s also important to show that you have the ability to work together. Even if you’ve simply known each other for a long time or hacked together on a side project. This can give investors the confidence that you can get things done. And make sure you know who the CEO is.
Many investors shy away from solo founders. Solo founders are often highly skilled and have enough technical skills or industry knowledge to get by as well as strong managerial skills. It’s rare to find individuals who excel in multiple domains. Beyond this, founding a company can be a very lonely journey, and having at least one co-founder can make it much more manageable. But don’t write off solo founders, they can definitely thrive. Just make sure any skills gaps are covered by early team members.
As mentioned, many investors might diverge from the questions covered here but this provides a strong starting point to understand the perspective from which investors assess companies. If you’re a founder make sure you have clear answers even before you draft your first pitch deck. If you’re an aspiring investor, pull out this framework and apply it to companies of interest. Before you know it you’ll be thinking like a venture investor - for better or for worse…
Thanks for reading! Know someone raising or looking to break into investing? Give this a share! And as always, please subscribe if you’d like to hear more! If you have topics you’d like me to cover, just hit reply :)
Amazing, love the perspective - good use of bolding too