Seed investment decisions — four simple questions
Recently I met with an entrepreneur who asked me a simple question: “how do you decide in which companies to invest?” That question is with me, as with any investor, at least since the first investment. Although it is a kind of an obvious question, the very fact that I was asked made me to revisit the process and criteria. I always ask four questions and I hope these four question will be helpful also for entrepreneurs on the other side of the table.
Obviously investment decisions are made differently for companies at different stages of development. What I am primarily interested in are investments in tech startups that have already built the prototype but do not yet have sales big enough to assess them on sales figures. As you see — seed investments is what I have in mind.
First — product
Does the company solve a real problem and does it solve it really well?
It is the basis of anything else — any business to succeed has to deliver value to its customers. Every product must be a solution to a problem. As Paul Graham says: Build product that people want. In more elaborated version it is very good to form a Customer-Problem-Solution Thesis: Who is your Customer, What is the Problem and What is your Solution (Product) that solves that Problem.
Product and CPS is necessary to make sales but it is not enough to build a big company. To do that the next element is needed:
Second — big vision
Is the market big and how to get a prominent position in this market?
Big vision is nothing else than: (1) a big market that already exist or will exist in future and (2) at least a rough idea how to enter this market, gain and keep a prominent position on this market. For me it is the big vision that makes a startup sexy.
Some companies are lucky to have such big vision from the very beginning. It is like a promised land for a company. Others have to zig zag and pivot before getting it right.
Third — making things happen
Will the team deliver what they plan?
The question can not be simpler than that. Has the team delivered in the past? Has the team delivered as much as possible in the last three or six months? Have they made things happen that seemed difficult, implausible or even impossible? As Steve Jobs said: real artists ship.
Fourth — leader
Will the leader and other founders grow with the company?
The leader and other members of the team get tons of experience as the company grows. In two years of growth they are different — the successful entrepreneurs grow from potential leaders to great leaders. They learn on the fly — it is real learning by doing. Therefore there is this question that each investor has to answer: is the leader flexible and creative and will they grow as the product, company and market change?
The first two criteria relate to the business, other two relate to the leader and the team. In addition, there are criteria concerning transaction, valuation and other factors — but it is quite a different matter.
There is also a question about gut feeling and chemistry. For me it is simple: if the answers to these four questions are positive usually I admire the entrepreneur and what they do. Some people say that experience of entrepreneurs and their track record is the key decision factor. For me all three are highly correlated: experienced entrepreneurs, positive answers to the above four questions and successful investments though not all successful businesses are run by seasoned entrepreneurs.
Each investor has their own personality and has their investment thesis, that is then verified by the achievements of companies in which the investor invests. Everything I write above is subjective but I hope it will help startups in their fundraising. If you are convincing on the above four elements I am convinced that you will make investors interested.
