Darwin Technology Ventures would like people to view our blog as a "diary of an early stage investor" where we share our thoughts, views and experiences. This first blog post aims to provide a concise answer to the question, "What do we look for when making an investment in a startup ?"
The one line answer to this question is the 3 P's, the 3 T's and the 3 E's. Since July 2007 when we made our first investment, we have reviewed hundreds of business plans and funding applications, only 26 companies clearly demonstrated they had all of the following to warrant our investment of time, money, experience and contacts.
The more in depth answer is we begin our assessment with Stage 1, by looking at the three P's, the People, the Product and the Passion.
1) The People - we like to look at the current management team, CEO, founders, angel investors, advisors, non execs if relevant and also one area often overlooked, people who have left the business. The old adage of "people buy people" is very true, often we have seen average business plans presented by world class individuals and decided to invest. Back in December 2008 we came across 3 young ladies running a fashion ecommerce business, the concept was fairly simple and their ideas limited, however 2 of them impressed us from day 1. The opportunity we saw was to change their product line, keep them focused and niche, but more importantly only agree to invest if the 3rd person left the business.
2) The Product -we look for niche, scalable products with either first mover advantage, disruptive technology or mass market consumer appeal. The products we have invested in recently have been ecommerce websites, internet technologies, iphone applications and consumer services. We look carefully at the monetisation options of the product, will the platform and back end systems be flexible enough to change from a "freemium" model to a subscription model ? Can the existing product be rolled out ino new markets or will it need local market adaptions ? Flickr.com is a great example of a startup that completely changed its product overnight based on feedback from its users, it started life as a gaming company but ended up as a photo sharing web2.0 pioneer and sold to Yahoo for over $40 million less than 3 years later.
3) The Passion - we look for individuals with real commitment, creativity and enjoyment in what they do everyday. Often we ask ourselves, are we backing the horse or the jockey ? Positive energy needs to be fed throughout a start up from the top down, people will either give you energy or take it away from you. Recently we were presented with an opportunity to invest in a Finish startup in the social shopping space, interesting idea, great technology platform, but most important of all, a very passionate young man who clearly lives, breathes and enjoys developing new ideas. When looking for examples of passion in the corporate world, one only has to look to Steve Ballmer and Microsoft, every year when he takes to the stage, his passion for the company explodes, type steve ballmer into youtube and you will see various clips of his highly energetic performances.
Moving on to Stage 2, we take the 3 T's into consideration. Usually in the 2nd or 3rd meeting we discuss the team, time and targets with the senior management team and look for conclusive, intelligent and insightful answers to all of our questions.
1) Team - how many world class people do you have in the team ? How long has the team been together ? Have the team worked together before ? Last summer we had lunch with 3 guys looking for funding in their new e cards startup, a very competitive market in Europe, US and most mature internet markets. After careful analysis we decided to back the jockey not the horse, the 3 guys had a solid track record of x 4 to x 20 returns for investors over the last 5 years. As a team, they had founded, run, led management buyouts of companies in very competitive markets such as gambling, bingo, poker and secured loans.
2) Time - are the sales, SEO, brand awareness targets for example realistic within the time frame quoted ? For a consumer internet business, SEO uplift will take between 3 to 6 months, sales teams will need time to find their niche, ability to add value to advertisers/publishers. Earlier this month we were contacted by a new UK social shopping startup quoting very aggressive revenue numbers and an unrealistic break even time frame in our opinion which prevented us from investing. Time can never be replaced or fast forwarded ...
3) Targets - how can you benchmark, stress test and quantify the numbers presented to us ? Break even forecasts, headcount targets, cost and revenue expectations all need to be fully supported. What does acheiving the targets mean for the business ? Are these the high/low targets ? Are headcount hires based on acheiving targets for example? Last year we funded a new ecommerce startup in the outdoor space with fairly aggressive user, revenue and profitability targets, we liked their organic growth/re investment model of ploughing profits back into the business to fund new hires once KPI targets had been acheived. (We are also pleased to see them enter the top 50 fastest growing companies in the UK this year.)
The final part of our assessment is Stage 3, the 3 E's, Entry, Execution and Exit
1) Entry - churn and burn. how much are you currently spending per month having entered your market space ? If you are pioneering your sector or have first mover advantage, how much did it cost to enter in terms of sunk costs, staff, outsourced development, initial marketing costs etc... We were presented with an excellent opportunity in the online travel market 2 months ago, however decided not to go ahead due to the uncertainty the founders had actually entered the market they had focused on, we felt they had been distracted with other projects and would need x4 more capital than they thought to enter their target market.
2) Execution - is the right team in place to execute the vision, strategy and exceed expectations ? Who is going to take the lead in day to day operations whilst others focus on direction, new opportunities, strategic partnerships and potentially M&A ? One of the best lines we have heard at a meeting earlier in the year with a mobile dating startup was "the only thing that connects the numbers in your business plan is the staple between the pages, you have no one to run this business! We cant stress enough the need to have thinkers and doers, slick powerpoint presentations from MBA graduates is no good unless supported with experienced, street wise, hands on individuals focused on daily operations.
3) Exit - are there potentially multiple exits for us in a 3 to 5 year window ? What is the most likely exit ? Trade sale, IPO, management buy out ? Who is on the short list of most likely acquirer at this early stage ? What have similar companies in your space sold for in the last 18 months ? Having dedicated anywhere between 6 months and 5 years of our time, experience and contacts to a business, we look for a healthy profit and chance to work with exceptional entrepreneurs again. We see the 1st exit as the start of a long term relationship with individuals.
Whilst we develop our new website please feel free to email us at myidea@darwinventures.co.uk with any questions, funding applications or invites.
thank you,
DTV Team
Subscribe to:
Posts (Atom)
