Swaying A VC In Your Favor: Five Questions That Can Make Or Break The Deal When looking for potential businesses to invest in, here are the five things investment firm BECO Capital looks for in a startup.
By Dany Farha
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BECO Capital has been associated with some of the most successful technology venture capital (VC) transactions in the region. The firm is a hands-on partner that assists its portfolio companies through growth finance and operational support. Its team brings a rich and diverse experience in venture capital, technology, entrepreneurship and finance, triggering value creation across all the business and operational functions of portfolio companies. This includes helping them to expand to new markets across the GCC, acquire key talent, implement operational improvements, adopt corporate governance practices and raise further growth capital. When looking for potential businesses to invest in, here are the five things BECO Capital looks for in a startup:
1. Does it qualify as a transformational solution?
BECO Capital looks to invest in businesses that leverage technology to transform an industry. The business needs to demonstrate that the solution it is offering is transformational, and it needs to be significantly better than what is already out there. Incremental improvements do not suffice. This is much more difficult to demonstrate in the aggregate. If there is a cost saving or gains in reach and efficiency, these are usually easier to quantify than value propositions. Things like measurability and convenience are more difficult to quantify, and we normally suggest that the business at the very least describes the process improvements that lead to measurability and convenience improvements and, where possible, "price" these improvements into the total transformation gains that the new solution provides.
2. Is there a sizeable addressable market?
BECO Capital is a VC investor, and as such, the firm needs to generate venture returns. In order to do this, the team needs the companies it invests in to be able to achieve a minimum quantum of revenues and therefore market cap. Ideally, we would like to invest in companies that can at the very least generate net revenues of US$20 million. In order to achieve this minimum scale, "market sizing" is a very important exercise. The firm does not like top down market sizing- for example the total spend in the F&B sector is $2 billion and if we capture 5% of this spend, this equates to $100 million in revenues. We're looking for a bottom up market sizing (also called "counting noses"). We are not talking about "market uptake" here. It's our job as investors to assess this risk and mitigate them as best we can. The greatest returns are generated by venture investors when market uptake adoption is unknown.
3. Has it demonstrated natural traction?
The firm looks for entrepreneurs who have built a working solution or prototype that has generated traction -be it in the form of traffic, engagement, revenues, customers, etc.- with little to no marketing spend. The company does not like entering at the earliest stages where a product has yet to be built or tested due to the risks attached. It's preferable that when the entrepreneur is able to demonstrate "product market fit," and an understanding of the unit economics of their business model: what is the cost to acquire a customer (CAC), customer lifetime value (CLV) and its profitability. The strongest entrepreneurs understand this and have it figured out early on and continue to mine their data to refine these KPIs.
4. Is there a strong founding team?
Great companies are built by great people. For BECO Capital to invest, we require a strong founder with an experienced management team that have deep domain expertise. Typically, the ideal founding team consists of one visionary to imagine the future and the product roadmap, another to build the product, and another to "take the market." Execution skills are crucial to building great businesses and for the less experienced entrepreneurs, this ingredient is much more challenging for us to assess. Second-time entrepreneurs are our favorite type as this again goes a long way to mitigate execution risk. Data collection and mining in order to continuously measure user and merchant activity are also essential skills that founders and management teams need to have and continuously develop.
5. Does it show network effects?
Businesses that display network effects are what BECO Capital looks at. Marketplaces exhibit this characteristic very well. What's the ideal model? Having a business that creates a positive feedback loop that spirals constantly. The larger the marketplace, the more valuable it is to all its stakeholders.
