I recently read this very good (and nicely short) article by Hunter Walk from Homebrew VC about how important it is for founders to ask VCs about the risks they are willing to take as investors that perhaps other investors are not as comfortable with. And equally how important it is for VCs to be able to clearly communicate the risks they are more or less comfortable with and prepared to take on. All startups come with uncertainty, and all VCs are prepared to take certain types and levels of risk — there’s a reason it is called ‘riskkapital’ in Swedish — but companies should look for alignment in order to (a) establish a long-term relationship, and (b) find an investor that can help them to de-risk.
Consequently, I thought it important to put down briefly into words some of the risks that we believe we at J12 are perhaps more comfortable with than the average VC might be. And, beyond that, briefly explain why that is the case.
- First-time founder risk. Many of our portfolio companies have been built by founders launching their first venture. We certainly believe that great entrepreneurs, and great teams, are capable of doing amazing things even when doing them for the first time. We look for founders that know their markets inside-out, that have great vision as well as a passion for the process, and retain a deep curiosity and desire to learn. While multiple prior journeys can be a strength, these ingredients can be stronger.
- Market adoption risk. We have invested on multiple occasions in companies that are pre-revenue, we do not need to see huge numbers of users already, and we are content if your only customers are pilots. What we want to see are the early indications of traction and product-market-fit, from a team that we believe knows what it is doing, in a market we believe represents a large enough opportunity and can be taken. We look to dig into the go-to-market strategy and plans to acquire customers, and see that we believe in it and the team’s ability to figure out the way forward.
- Scaling risk. We invest in companies and products that we believe have great scalability and the potential to be international winners in their markets. But we don’t need to see that you have cracked the method of scaling just yet. We don’t need to see that you’ve worked out the international playbook, or that your unit economics are proven and already where they need to be. We look to see that you are working in that direction, that the trends are heading where they should be, and that together we can form a plan to start scaling and enter into a greater phase of growth.
Why do we feel particularly comfortable with these risks?
Our DNA. We’re entrepreneurs ourselves and feel we’ve been fortunate, at various times in our careers, to have been backed to do things for the first time. We also come from a history of investing at the angel stage, and therefore early companies are what we know best — we have a passion for, and a deep understanding of, seeing companies go from initial traction and early product-market-fit through to repeatable, predictable, scalable sales.
Our model. Our hybrid fund/angel model means we surround ourselves, and co-invest, with individual angel investors that have great expertise within various sectors, technologies, and business models. The close proximity of this experience gives us the wider network and greater resources to support founders in more quickly and more effectively understanding the markets they are taking their products into, and how to do it.
Get in touch to share your own views or if you’re a founder that would like to bounce thoughts on the development of your company.