what will daphni not invest in
Congratz! You’ve read everything you needed about startup funding 101.
As a conclusion, we will show the consequences of the main elements we highlighted in daphni’s investment policy:
Not Scalable Enough
In part 1, Growth Is The Only Way, we’ve seen that startup = growth. Scalability is the core of a startup, so funding a startup requires scalable models.
Takeaway: daphni won’t invest in companies where man-hour is a part of the billing model (setup fees excepted).
Not Commited to Growth
In part 2, The Jedi Trick: You Have to Choose Between Growth And Profits , we’ve seen that schematically there is a trade-off between growth and profit and that most startups needs to focus on maximizing gross value, not net value.
Takeaway: daphni won’t invest in companies that doesn’t invest all their money and efforts into growth. Startups can’t afford to distribute dividends. We are at ease with a startups that lose money during its development.
Not Data-driven
In part 3, If Growth Was Easy To Forecast, There Would Be Only One VC fund: Nostradamus Partners, we’ve seen that growth is very hard to forecast. So companies need to focus on the right KPIs to measure its progresses and understand basic market dynamics.
Takeaway: even if daphni focuses a lot on the quality of the founding team and on the market (and we make bets even when the future is hard to predict), the KPIs showed by the founders matter because it helps understand the core business elements that show the health and the growth of the startup.
Negative Gross Margin
In part 4, You Need to Lose Money, But Some Loss Are A Really Bad Idea, we’ve seen that if growth matters, fundamental economic units too. Companies don’t need to look for profitability but they should aim at having each transaction profitable, operating costs excluding. Selling $10 notes at $1 ensure growth, but not the right growth.
Takeaway: daphni will take into account the economic units to evaluate a company’s potential, having in mind that gross margin should be positive.
Transactional Models Not Disciplined Enough
In part 5, How To Have Growth AND Profits? — part1, we’ve see how to reconcile growth and profitability with transactional models (e-commerce, SaaS, etc.). This business model makes it easier to forecast because of the existence of cashflows and the ability to measure one’s propensity to use the product as a premium user.
Takeaway: transactional models need to be data-driven and keep a strong discipline with analysis. daphni will ask not only average revenues & costs but also their distribution among the users.
Non-Transactional Models That Don’t Understand Their Users
In part 6, How To Have Growth AND Profits? — part2, we’ve seen that reconciliation between growth and profitability is also possible in non transactional models (social network, IP-driven companies, etc.). The methods are very similar to those used with transactional models, but they need to select proxies that measure the engagement of the users.
Takeaway: daphni won’t consider that non transactional models are non fundable. On the contrary, we believe that value created can be captured later on: tech startups don’t need to generate cash from day one. Yet, investing in these models don’t mean to make blind bets, especially after seed rounds: it is possible to rigorously analyze the engagements of users.
Despite Everything We Often Fail
In part 8, Fail Often, Fail Fast. Investors Does Half of That, we’ve see that investors often fail. We are making both false positive (companies in which we invested that eventually fail) and false negative (companies that we pass on and that eventually become huge successes). Investors can’t be right every time and the fact that we invest or pass is in no way a good indicator to the future success of the analyzed startup.
Takeaway: daphni will always remind you that our decisions to pass doesn’t mean that your idea is bad, only that we don’t feel sufficiently at ease to invest. It might be because of the difficulty to forecast the market (complex market dynamics) or due to decisions about our investment thesis or portfolio management (stage of the company, sector, business model, due diligence or existing investment in a competitor, etc.). And remember: we are always happy when we see startups succeed, even if that means we missed a good deal.
Having founded our company ourselves, we know how difficult it is to grow a company and to be on the road to raise funds. So we chose to be as transparent as possible with founders to explain them our beliefs (read our chronicles!) and our investment framework.
If you are a founding team, we highly encourage you to read our investment thesis to understand our vision and the companies that we are looking for.
Want to know more about startup funding? Read our articles:
Part 1 — Startup Funding: Growth Is The Only Way
Part 2 — The Jedi Trick: You Have to Choose Between Growth And Profits
Part 3 — If Growth Was Easy To Forecast, There Would Be Only One VC fund: Nostradamus Partners
Part 4 — You Need to Lose Money, But Some Loss Are A Really Bad Idea
Part 5 — How To Have Growth AND Profits? (Part1: Transactional models)
Part 6 — How To Have Growth AND Profits? (Part2: Non-Transactional Models)
Part 7 — What About Valuation For Late Stage Startups?
Part 8 — Fail Often, Fail Fast. Investors Do Half of That
Part 9 — What daphni will not invest in
Reminder: daphni investment thesis
