What I learned in my first week in VC.
Back in April I began my journey in VC by joining Reinventure as an Investment Analyst. Coming from a startup environment in quite a different field from fintech, I didn’t really know what to expect in my first week.
Naturally, there was no hesitation in getting me involved from the start. Analysing the portfolio companies, getting up to speed on the current deals in the pipeline and wrapping my head around the latest in fintech was where I began.
Amongst the general excitement and confusion that comes with any first week, common themes continued to arise as the team discussed one startup to the next, allowing me to identify key elements of the Reinventure investment process. Here are some of the things I learned in week one:
1. Initial investment criteria
In an ideal world, the investment team would be able to assess each and every deal that came through the pipeline. But the reality is that many deals will not progress through to due diligence, let alone enter the term sheet stage or receive funding.
Amongst all the noise, it’s important to maintain a (relatively) strict investment criteria for prospects, to ensure time is well spent on ventures that have a high likelihood of progressing.
Reinventure typically looks for and invests in companies seeking Seed or Series A funding. Seed investments of ≤$1m and Series A investments of $1–5m are the norm. Startups coming forward with an MVP product are also highly preferable as it provides a solid foundation for determining where the business is headed.
2. Founder-first mentality
Some time ago I was told that you can think of a startup as a three-legged stool; comprised of the market opportunity, the product and the founder(s). Obviously the first two are important, but from a VC perspective, the potential for success heavily rests upon who is at the helm of the company.
I have consistently noticed the investment team discussing and analysing the management of a venture; since any subsequent funding is essentially backing the entrepreneurs to turn their ideas into reality and transform a market (especially for very early stage startups).
On top of this, an investment is only the first step in the process, and marks the beginning of a long-term relationship. Through our unique partnership with Westpac, part of the conversation around any potential deal always includes the value that Westpac can add to the founders and their businesses. Coupling the vision and determination of founders with the support and experience in financial services from Westpac/Reinventure sets a strong foundation for long-term success.
3. Disruptive vs. sustaining innovations
As a member of the investment team, making initial assessments of startups and what they are trying to achieve is part and parcel of the role. Even after just one week, I noticed Danny, Simon & Rohen consistently discussing the potential for any product/service to disrupt their chosen market. Disruptors have the highest chance of achieving rapid growth in the shortest amount of time (you can probably think of a number of examples).
‘Disruptive Innovation’, developed by Clayton Christensen, has underpinned Reinventure’s investment thesis from day one. Key questions I have to ask myself when looking at prospects include:
- Is this company targeting an underserved/low-end market?
- What is the value proposition?
- What does the competitive landscape look like?
- Could Westpac add unfair advantage to this at any stage?
- Do I think this product is interesting?
4. What does the data say?
In VC, it is often the case that the data surrounding an investment is scarce, thus a quality over quantity mindset needs to be taken (if possible). The Reinventure team consistently looks for the following metrics as a baseline indicator as to whether a deal should proceed through the pipeline:
- TAM (Total Addressable Market): The size of the market the venture is aiming to disrupt. TAM must be large enough to justify the risk of the investment.
- MRR (Monthly Recurring Revenue): Recurring revenue is much more interesting due to its higher degree of certainty in the future.
- MRR growth: MRR is great, but consistently increasing MRR is imperative.
- Unit Economics: Customer acquisition cost, average revenue per user, customer lifetime value etc. are all important to analyse further into the due diligence stage.
- Moat: My first question was what moat stood for. The fact is it is not an acronym, but simply the defensibility of the business en route to success — popularized by Warren Buffett. The Reinventure team always looks to determine how a venture will maintain its competitive advantage over the long-term.
5. General observations
Outside of the deals in the pipeline, the following are some observations about the fintech landscape which are impacting the way Reinventure analyses startups:
- The financial services stack is modularizing, presenting exciting opportunities for specialists to take over each layer in the stack. Something Reinventure has been capitalising on through its portfolio investments.
- Consumer and SME niches are paving the way for disruption.
- Big tech players (Google, Amazon, Facebook, Apple) are knocking on the door of financial services and there is nothing we can do about it.
- The blockchain is creating a new web with financial services embedded.
Overall, like any first week, it was an information overload prompting the need to read up on whatever I could. It seems as though Simon, Danny & Rohen know something about everything!
I look forward to learning from and working with the Reinventure team as well as the founders that join the portfolio.
