It is fascinating how people are interested in finding out about the secret sauce of investing, what we look for, what type of entrepreneurs we back, what turns us on or off for that matter, what will be the next big wave of companies we will be interested in.
This week my colleague @torremochaj and I were invited to talk to a group of around 30 Googlers interested in finding out more about what we do and understand how to get funded. It still amazes me how Google is clearly not afraid to fuel an entrepreneurial spirit within their teams. Well done! Clear sign of how great of a company Google really is!
We answered openly to their questions and we thought we would do a little write up we could share with you all. Here are some of the questions we covered.
When you invest in a company, what are the most important aspects that you take into consideration?
There are certain traits that a company needs to have to make it a potential interesting investment for us:
- Great team: We look at the team’s caliber in terms of experience, passion and drive for the business, how they came to found the company (out of a need they had to solve a problem, a passion or interest). We look for visionaries but also founders that can focus on execution. If there are entrepreneurs that have an exit to account for that is also a plus. Even if the team does not have serial entrepreneurs we look for founders that know what they are up against and are clear leaders able to attract top talent.
- Global and scalable businesses: We look for businesses that have the potential to scale quickly and be big players within their category. We are not in general fond of copycat models that are recreating a business just in another market or in another language. We believe great business ideas can originate anywhere, also in Spain and we seek entrepreneurs with a vision to build global companies.
- Differentiated technology: We need to understand how the technology is different, how it solves a problem in a more effective way. We believe that great technology attracts great engineers and this is a recipe for success.
- Strong unit economics: We are early stage investors. We obviously look at revenue potential and profitability but we know this will come as long as the fundamentals of the business as measured by the unit economics make sense. If we are looking at a consumer facing company for instance we need to understand how sticky the product is, what is the churn, user engagement.
In your opinion, how should entrepreneurs think about balancing out their ambition and drive to implement ideas vs. business planning and financial rigor? Which one (if any) has proven to be more important when looking at past success stories?
We believe more experienced entrepreneurs have a better understanding of what it takes to strike a good balance between closing a round of financing vs. valuation vs. finding the best money to help the business get to the next level.
One of the most common pitfalls entrepreneurs can fall into is spending a lot of time on valuation very early on. Achieving a very high valuation will imply less dilution for the founders, which might be really good on paper but could be a liability going forward. Raising a round at a very high valuation can put great pressure on valuation for a follow on round. There is nothing worse than having to do a downround. Building on the valuation as the company grows is always a much better equity story.
The other pitfall is to focus too much on the idea and never translate it back to a real use case. At the end of the day the technology will only prove valuable if it solves a real pain in a given industry. If the founders fail to spend time on this, raising a round can be too risky. Investors will look for a use case, which is the jargon to really refer to how is the technology going to be relevant.
In terms of financial rigor, the more rigor the better. We look at many financial models so we can distinguish rigorous vs. unrigorous excel modelling. If a company at an early stage has a solid business plan, this speaks highly of their ability to track things correctly and is a good indicator on caliber of the team. We do not expect companies to have experienced CFOs on board at early stages but sound modelling is always a good sign.
What are the most common metrics / KPIs investors take into account to track early-stage startups?
This varies depending on the nature of the business. We work together with the companies to understand what are the key drivers of the business (eg. Page views, visits, first time purchases, number of new clients per month. repeat customers, churn…). Each business will have its own key metrics. We need to understand what will be ultimately driving success that will translate into revenue. We will then look at P&L including revenue, COGS and other expenses to arrive to EBITDA.
Is the tech start-ups landscape evolving positively in Spain and what factors/opportunities could accelerate the improvement?
We believe the ecosystem is developing at a very strong pace
- Barcelona and Madrid are clear tech hubs (Google Campus Madrid, Amazon or AirBnB in Barcelona)
- We have access to great engineering talent at a fraction of the cost vs. US
- Great universities both in business and engineering schools both in Madrid, Barcelona but also Valencia or Málaga
- Access to capital is now a reality. More VC funds have raised funds lately and there is more money available for start ups both in seed and Series A stages
- Access to grants both at a local and European level is also helping companies complement their financing rounds (Enisa, H2020)
- Good access to working visas attracts international talent
The ecosystem could still benefit from better taxation on ESOPs and in general more flexibility in the labour market.
Which verticals are you more interested in?
We have a very horizontal approach to investing. We are interested in the Spanish angle of the investment be it Spanish start ups or international startups with tech hubs in Spain. We believe as a fund we can add value from our deep knowledge of the Spanish market and we can help startups bridge the gap between initial rounds and growth rounds that require access to international funds where we have very strong connections with the most relevant ones.
We also believe the geographical approach requires us to have a very broad industry approach since the market is not big enough to become too specialized in a given vertical. There are verticals we do not invest in (biotech, hardware). We have a very diversified portfolio (40/60 B2C/B2B) in industries ranging from ecommerce to ioT, AI, adtech, automotive mobility, gaming, security, SaaS.
Are there any signal/s that once you spot you decide not to invest in a project?
There are a series of red flags that are closely related to the first question on what would drive us to invest. So equally most important red flags relate to
- Lack of top quality team
- Poor understanding of the problem the company is trying to solve
- Overly crowded space where company does not know how it will compete/go to market is unclear
- Poor quality of investor decks, business plans, understanding of key KPIs
Out of all of this I will clearly focus on the team at least in the stages we invest in. If the team is stellar they will overcome difficulties, if the team is not well balanced it will be tougher for them to work through the tough times as a team. And there will be incredibly difficult times, we need founders that will also seek for help, will understand what they are good at and what skills they lack. Founders that will use us well, will seek guidance and support. We enter into a marriage or a long term courtship, we need to see that we will be there for each other in the good and not so good days.
Which metrics in the short and medium term indicate whether a venture capitalist is performing well? Taking into account that success on startups can take many years
Ultimately we will do well if our LPs make a good return on their money. A fund lives for 10 years, 5 year investment period and 5 year period to exit the investments. A portfolio can be revalued up based on follow on rounds of prior investments so the fund can look good on paper but until an exit is realized there is no real return for the investors. This is a business where ultimately investments need to be exited, which at the end of the day takes time.
Given the long time span of any given fund, a VC firm’s success is measured by its ability to continue to raise new funds, which ultimately speaks for the trust the investor base has in the investment team and its ability to pick winners and help them grow even before exits take place.
Key take aways from our session with Googlers
Founding a startup may seem sexy and exciting, which it is, but it is also a very hard winding road which requires full dedication and passion. Raising funds, worrying about employees or burn rate, keeping lucid to anticipate changes and adapting to them, attracting great talent… all of these are no easy tasks. A great deal of success in startups comes with great founders. We look for ambition and passion but we also look for humbleness and generosity, all of these qualities are needed to build great teams because ultimately great teams win. We love finding and backing these great entrepreneurs and watch them build great teams. Really inspiring and rewarding when that happens and we can be part of it!