Why We Invest in Dragons, Not Unicorns
Venture Capitalists are often asked what they look for in an investment, how they pick one entrepreneur over the other, and more importantly, how they identify those elusive ‘unicorns’.
After closing Nauta’s fourth fund earlier this year, our investment teams have met, evaluated, and had intense conversations with hundreds of entrepreneurs.
With 11 investments made so far from this fund — from RetailTech, MarTech to Data Analytics and Marketplaces — we wanted to re-visit the main pillars driving our investment thesis and provide some insights into the types of what companies that get Nauta’s VCs excited.
Large industries with untapped potential
Disruption may be the start up/VC scene’s second favourite buzzword, but for us, the phrase conveys a slightly different meaning.
You see, we’re looking for B2B software companies, and selected lean consumer plays, disrupting large markets where technology has had a limited impact but have strong prospects for rapid change.
While most of our companies influence or impact consumer experience, they’re often high margin and efficient entities.
For example, Nextail, one of Nauta’s portfolio companies, provides a SaaS-based inventory management solution that helps fashion retailers optimise the stock both in the warehouse and in the stores.
By targeting the retail operations market — estimated to be worth $2B — Nextail is addressing a growing global trend to improve business decisions using predictive analytics.
Through Nextail’s platform, retailers are able to look at their inventory with an agile retail approach thereby increasing revenues by reduction of markdowns, stock-outs, and both in-store and online stock coverage.
On the consumer side, Nextail’s solution provides an enhanced customer experience as their demand is better met.
On the other hand, ChannelSight has developed an e-commerce enabled ‘Buy Now’ technology that is added to digital marketing content to help large brands increase sales by making it easier for customers to find the products they’re interested in a retailer that’s relevant to them.
For brands who spend large budgets on their digital content, ChannelSight’s platform allows them to see what ads are driving conversions on third-party retailers and modify their messages to optimise conversions and therefore increase sales.
Both of these portfolio companies have gone after large, existing markets, that have remained undisrupted by technology. What’s more, although they’re clearly B2B companies, they have a deep consumer focus, making them great examples of the types of companies we look for at Nauta Capital.
Investing In Dragons, Not Unicorns
According to a report from PWC, there were 13 companies that joined the unicorn club in Q3 of 2017 globally.
Unicorns, generally defined as companies valued at $1Billion+, are certainly not the only thing we look for at Nauta.
We believe the VC model has focused on the ‘Unicorn’ concept for too long.
From an investor perspective, the valuation is not related to the capital used in reaching the $1Billion benchmark so in practice the unicorn definition does not say anything about the return on the investment.
For founders, the unicorn concept means that they’re pushed into growing fast too early while raising too much capital to support this hyper-growth.
As a result, there is often a conflict between equity raised, valuation, and the company’s performance — causing many good companies to burn and crash.
So instead, at Nauta Capital, we look for what is known as “Dragons”…because unlike unicorns, dragons have the capacity to return the entire fund.
These companies are founded by entrepreneurs who believe in capital efficiency as passionately as we do. Rather than seeking large investment rounds to validate their businesses, they have a clear monetisation model while at the same time valuing their various options in the long-term.
It’s also worth noting that often these entrepreneurs have either worked in the industry they’re targeting or have founded a company before, making them well-versed in both the challenges and opportunities of their respective industries.
Lastly, it’s important that the companies we invest in either already have an international reach or have an expansion strategy in place.
Currently, we have investment teams in London, Barcelona and Boston, where each team is focused on meeting the most promising early-stage software propositions in those geographies.
As one of the only truly pan-European funds with U.S. reach, founders contact us because they’re looking for a strategic partner that can help them break into one of our key hubs. In fact, while around 80% of our current portfolio companies have European origins, the majority transition to the U.S., for a commercial explosion, growth funding, and M&A.