5 Investment Checklists For VCs For 2020
It's highly likely that the 2020 (and beyond) investment criteria will be influenced by our learnings of the recent past
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Venture capital (VC) activity in 2019, while healthy and abundant, has raised eyebrows when it comes to entry valuations and exit multiples (Uber, Peloton, for example). Another aspect that has been put to pressure testing is the weak governance structure in portfolio companies that allows entrepreneurs carte blanche to run their organizations. There have been instances wherein high-octane founders have bypassed time-tested 'best practices' of business ethics. Readers would be aware of the conflicts of interest at WeWork and the splurges at Wag. In some cases, founders have gotten away with outright fraud (Theranos, September 2018) because their board was either too weak or simply had an incentive to look away.
It's highly likely that the 2020 (and beyond) investment criteria will be influenced by our learnings of the recent past. Path to profitability, efficient capital structure and robust governance models will be the new normal.
While growth is the name of the modern start-up game, we strongly believe that growth at any cost (outsized burns) is a recipe for disaster. Our investment philosophy is to acknowledge growth while incentivizing operational efficiency. Following is what we consider to be the building blocks of our future portfolio companies.
Also Read: VC 100: The Top Investors in Early-Stage Startups
It should work with minimal intervention, be well-designed (software or hardware) and reasonably easy to get acquainted with. Sounds simple enough, but my experience with looking at thousands of these has made me a contrarian. Perhaps we VCs have some blame to share by fueling a constant urgency to march ahead, sometimes causing founders to push a product out with chinks.
Cross border potential
We like when start-ups solve problems across borders. Not only is this great for business, it also creates stellar optics and visibility for the company. The founders learn to ply their trade in diversified cultural and business environs (something they may have to do anyway in their non-negotiable quest for growth). Additionally, companies are able to use dynamic pricing and cost structures that unlocks margins. There are just so many positives with this aspect.
Dogged believer, constant learner, resilient to setbacks and physically in great shape—good entrepreneurs overperform by feeding off of encouragement (monetary or otherwise), but great ones also emit a palpable energy that keeps the followers (investors and employees) going. We like the ones who know their stuff but like to listen as well. They are rock-solid but can shape shift if they spot impending danger. More often than not, these also have a great sense of humor.
Also Read: What Venture Capitalists Look for in Start-ups
We like cheap growth. It scares us when we see companies trying to drive 5 per cent per week growth at all costs. That way, things have been known to get out of hand. Simply put, a business like this will need founders to be in a constant mode of raising capital instead of focusing on their business and strategy. Even if they achieve this, a satisfactory exit becomes improbable.
Focused and dense TAM is our flavor of the year. We are excited about sectors such as vertical SaaS. Not every start-up can or needs to be a Unicorn. There are stable pockets of demand that need to be catered to, and they are ready to stick with you should one not fail to meet expectations miserably.
Notably, we are inclined towards B2B, B2B2C companies, however, we are always excited to receive ideas that reach out directly to the end-user and changes their way of life.