The 5 Ms of the investment process — understanding what investors are looking for
We all know about the 3 P’s of marketing: price, product and positioning. But what about the 5 M’s of the investment process and Venture Capital?
I came across this concept while attending the New Entrepreneurs Foundation workshop on Entrepreneurial Funding, run by Itxaso del Palacio (Investment Director at Lepe Partners and Teaching Fellow at UCL), and thought it was an interesting way of summarising the key elements to consider before going for funding.
Let’s briefly review what the 5 Ms are and why they’re so important to know when going into a pitch in front of a VC/investor.
First of all, some background: due diligence is something that happens within the investment process and a VC will carry this out on your start-up to help him/her choose, as Itxaso says, “the prince between the frogs”.
The Due Diligence is the process through which an investor evaluates a proposed investment for its cost, benefits and risks.
The 5Ms concept, initially created by Eugene Hill, Partner at SVLS, ties into this process and refers to the following:
What is the real size of your addressable market? Investors want to see that you will be able to reach a reasonable size of the overall market and what is the real opportunity there. Points to consider would include: Size, growth rate, degree of competitive penetration, concentration of participants, pricing and profitability dynamics, barriers to entry.
Here is what I would describe as the “power of the team”…do you have the A team in place? We all know that the success of a start-up is not only in the idea it is mostly in the execution of it. So, what investors look for is the team’s experience and expertise and how this will support the development and growth of the start-up. Key points to consider would be in: stage specific skills, market specific knowledge, track record, education, capability and vision.
This element will show that you have thought about how you will want to build and sell your product, what your competitive advantage is and how you can keep it. How will you go to market and where will the money come from to do this? The key points here will be about your financial strategy, Capital requirements, Structure, Valuation, Liquidity Path, Use of Proceeds.
The method is about your secret sauce. What are you doing that make your value proposition different?
Here an investor will be looking at: your business & pricing models, your strategy for growth (organically or by acquisition), is your business proposition completely new in that case it will be tough or are you improving on some existing solutions, how do you intend to work : better, faster, cheaper, looking at cost reduction programmes?
This is about showing the investors that you have already tracked some key metrics and data to validate your product/service. You are no longer at proof of concept here. The key points to consider and to show would be: existing customers (feedback), traffic, conversion (acquisition, activation, retention, referral, revenue…), is there any price sensitivity, your stage of product development, rotation of team members.
To help your start-up get noticed and attract attention, it pays to centralise your investment seeking strategy around the 5 Ms and ensure you can answers investors questions on these areas of your business.
I hope these tips will help you to stand-out from the crowd!
Programme Director — Learning & Partnerships, NEF