What We Look for in a Startup
To set our investment philosophy down in two sentences:
We partner with unrelenting and smart founders who have a clear vision to build future market leaders with long-term barriers to entry. We look for companies selling software-based products that drive innovation and efficiency and eventually become indispensable to their users.
This seems quite dense but if we unpack it a bit, it touches on three elements that form the basis of how we think about investment at NXTP: team, market opportunity, and business model.
The team is hands-down the most important component of any investment decision we make. Neither a huge market opportunity nor a genius business model can compensate for a less-than-stellar team. So here are a few questions we look to answer for ourselves when evaluating a founding team:
- Do they seem smart, transparent, competent?
- Do they display strong leadership qualities and an ability to inspire and effectively communicate company vision?
- Are they capable of attracting top talent to the company?
- Is there strong founder-market fit, do they show domain expertise, and are they customer-centric in their thinking?
- Are they data-driven and analytical? Do they have a strong understanding of key drivers of their business?
- Do they seem intellectually curious and hungry to improve and accelerate the company’s learning curve?
- What was their prior experience? Do they show excellence professionally, academically, or otherwise?
- Do they show obsession and unwavering commitment to solving the problem they are going after?
Each of these questions tries to assess whether the team can build a large business — and whether we can see ourselves doing so in partnership with them.
While a team’s ability to execute is vital, we also need to ensure that they are doing so in an attractive market. Usually, most founders displaying the above traits are, ipso facto, going after interesting market opportunities but here is a list of things we look for.
- Favorable long-term market growth tail winds and opportunity for efficiency gain through technology.
- Sizable total addressable market (TAM) with opportunity for increased software penetration.
- Potential for current/future products to grow 10x+ in the market over the next 8–10 years.
- Potential for regionalization beyond initial core country of focus (into Latin America).
- Markets with local barriers to entry from international competitors.
Detecting and adequately evaluating market opportunities is part art and part science. As investors exclusively focused on Latin America, we like to think that we have a good read on the market. These local sensitivities help us identify opportunities with regional barriers to entry and high defensibility in the long term.
On a high level, we are most attracted to businesses that operate in the B2B space and solve a clear problem. We value products that represent non-discretionary spending to their buyers and have the potential to become deeply ingrained in a company’s workflow. More granularly, we are attracted to business models with the following characteristics:
- Software-based and capital light — we particularly like B2B SaaS companies.
- Recurring and scalable with sound unit economics and high inherent product stickiness.
- Differentiation and barriers to entry with long-term competitive advantages.
- Attractive financial profile with clear path to long-term profitability.
- High inherent network effects/operating leverage and sales virality.
- Ability to leverage data/AI to provide business intelligence down the road.
- Logical exit avenues (acquisition, secondaries, IPO).
Not every venture we invest in has a business model that indisputably ticks all the boxes. But they do meet the vast majority of these characteristics because we believe they lead to the kind of sustainable, long-term value creation we get excited about.
Finally, a few words on the stage or maturity of the business we invest in. We typically like to see the product in the market being used by customers, but also explore earlier stage companies opportunistically, especially when the founders have deep domain knowledge and experience founding or operating tech companies.
If you are an entrepreneur and this sounds like you, we would love to talk with you . It usually helps to get a warm intro from someone who knows us. If not, we are open to cold emails. We commit to reading every email, although we might probably not be able to respond to all of them.
Originally published at https://nxtp.vc on October 8, 2019.