Every VC group has their own unique experience, perspective and thought process when evaluating startups. The following is how Urban Us evaluates potential investments.
We back companies at a range of early stages. Sometimes we work with teams who don’t have a product, but in most cases, our companies are starting to work with their first customers and don’t just have a side project. For us to work with the earliest stage companies, we need to be especially excited about a) the problem they are solving and b) who is on the team. This does not mean founders need to have everything figured out or be on their 2nd or 3rd startup (more on that in the team section) but we need to see that they have a deep understanding of the problem they’re solving and how they might rapidly scale their impact. As a rough test, we like to see if we believe the product or service could positively impact 100 cities within 5 years.
Thoughts on business models
We love hardware. Our URBAN-X program is uniquely set up to benefit from BMW/MINI’s deep expertise in design and manufacturing with our Experts in Residence. We have worked on everything from satellites to steel-reinforced concrete building robots. However, hardware companies need to look beyond equity investors, including Urban Us. Even if you can overcome issues related to manufacturing risk, many investors may pass because of a more complex mix of capital requirements to grow. Because of this, we end up investing in fewer hardware startups than we would like. In the past year, we have figured out how to help hardware companies secure additional types of capital by raising a hardware-centric debt fund and funding a spin-out, Perl Street, which focuses on solutions for capital sourcing.
Selling to or working with governments remains challenging. Like hardware, we love working with teams who build for all levels of government, but also like hardware, many investors avoid this category. In general, investors have encountered two problems for B2G teams. First, for larger contracts, you need to participate in RFPs which tend to meet 18–24 month sales cycles (often an order of magnitude longer than what these investors are used to from B2B sales). There are ways to speed up with much lower pricing, but that typically leads to the second issue: the lifetime value simply does not compute versus the cost of acquiring the new customer.
For that reason, our ideal teams who work in B2G are also able to sell B2B2G, especially during the seed stage. This helps them avoid some of the investor concerns for these types of business. Related to B2G is civic and gov tech, a category we know is essential to cities. But too often, models look a lot like media businesses and this unfortunately also means a small universe of potential investors. For that reason, we also do fewer govtech and civic tech deals than we’d like.
We believe that change in cities come from all industries and people — government, startups, corporates, NGOs or not for profits, small businesses, consultants, contractors, academia and more. However, because we are focused on rapid deployment (i.e. 100 cities in 5 years) this usually means there has to be a core technology that enables this expansion. Very often it’s machine learning on the product side or some part of the distribution that allows for low friction referrals and adoption. So most of the time we don’t see a fit for traditional small businesses or consulting firms. Interestingly, a few great startups started out doing consulting but then figured out how to automate or otherwise productize what they were doing. We don’t currently have a way to invest in not-for-profits right now, but we are working on ways to have teams audit some of our URBAN-X sessions.
Deck vs. URBAN-X Application
We don’t expect everyone to have a well-designed pitch deck. There may be a high correlation between poorly designed materials at an early stage and great engineering talent, but we’ll save that for another post. For our accelerator URBAN-X, we have a short application. There is a lot of information you might want to share, but the application is just a couple of the most important questions related to the topics below. Once we have some background from a succinct application, we’ll send follow-up questions and find a time to meet if our interest is piqued.
We invest in the thesis of improving life in cities. For that reason, we focus on sectors that cover food, water, waste, the built environment and real estate, infrastructure, and industry, energy, public health and safety, transportation and govtech. It’s not that we don’t value education or healthcare, but today they are not a part of where we invest. These areas aren’t always straightforward, and there are always grey areas, but we encourage applicants to examine the sectors page on the website and our existing portfolio companies to get a sense of what we are looking for.
Finally, it’s often the case that multiple companies are focusing on the same problem and have similar solutions to one another. During URBAN-X, we’ll only pick one of the companies. We do invest in businesses that are similar but not directly competing because many will pivot. We don’t think it’s fair to have two businesses working on the same problem in the same cohort. If we find that startups become similar, we’ll assign different partners to each team to avoid any conflicts.
We score each opportunity across 7 areas. The following has examples of typical challenges we find with each.
This is the most important category for us. If you don’t set out to solve a large urban problem, even if you are successful, you’re not going to have much impact on city life.
This can be frustrating for a lot of startup founders, but it’s important to understand that venture capital and in our mind, large scale impact requires 100s of investments, most of which will fail to deliver significant impact. With this assumption, it’s only worth spending time and money investing in the things we believe can grow to be very large and can positively impact many cities.
Broadly we are looking for impact in one or more of the following areas:
- High GHG reduction potential per source such as https://www.drawdown.org/
- High resilience in areas like heat, flood, food, wildfires, freshwater, air quality, epidemiology
- High impact on persistent urban issues such as traffic, affordable housing, public safety, public health, etc.
A large market size will result in annual revenue which can get to a $1b+ valuation. One way to think about this is how investors value different types of businesses based on revenue. As a rough guide, here are some multiples to consider:
-B2B SaaS 7x
-B2C Hardware 3.7x
-B2C Marketplace 3.2x
We need to believe there is a path to sizable revenues via the current market. For example, are you building a SaaS company that can get to about $1m in annual recurring revenue in 100 cities? That would make you a $700m, which would certainly get our attention. Ideally, you can share some bottom-up math to support the estimates. It’s also helpful to consider adjacent opportunities.
Related to both impact and market, we often see a country or region-specific problems that might be solved somewhere else. In these cases, we’ll generally not invest because we want to be able to help and many times, we can’t be as useful in markets we aren’t as familiar with.
Before we meet teams, we consider a few factors.
Things that make teams better. Founders who have worked together before and previous startup experience (sometimes as a founder, but heading up a major business function such as product or sales works too). We like deep domain expertise or deep business functional expertise, especially for B2B firms which make up more than half of our investments.
Things that make teams score lower. We love and work with a lot of first-time founders, but only when we love the problem they’re solving. It’s ok to be a solo founder, but if you are working alone, that’s not the same thing. Whether you have a co-founder or some early employees, it’s an important first step to showing you can build a team. You’ll ultimately be raising money which is mostly going to be used to bring on more team members. We need some indication that you can attract talent to your cause. We know that not all founders stay on, but if a founder has left, we’ll have questions before we get comfortable with the team.
Too many teams don’t make a strong case for why they have the best, relevant experience to solve the problem. For B2B, it helps to have deep expertise or experience in the relevant industry. Similarly for B2G, it helps to have worked in or with the government. For consumer products, it helps to be an obsessive, potential customer. But beyond knowing the customer, it’s important to show some experience in relevant functional areas like product, engineering, marketing, etc.
Why do you want to work on this? Startups are hard so it helps us to know a bit about what motivates you beyond hopefully making some $$. We love to hear teams explain why a problem is important to them.
Is this startup your side-hustle? This can be ok, but we need to be clear about the conditions for you to work full time. Usually, if you say, “If I receive funding,” it does not feel like a real commitment.
We are generally not worried about the current version of the product however if you are already receiving public, negative feedback, it’s much harder for us to get excited. It’s often hard to reverse negative ratings and reviews unless you build or release something new.
We like schlepping. Paul Graham has a wonderful explanation of how perceived schlep blinds many founders to opportunity. This seems to be especially true in urbantech where it’s not unusual to have to work with multiple stakeholders to understand a problem and then again to test solutions.
Sometimes teams will tell us they aren’t technical but have outsourced development or that they are going to hire a tech co-founder. We can’t invest in these types of teams because a central assumption for us is that tech should a core part of your company.
Rather than focus on what the product or service is today, this is a look at how the team is making decisions about what the build and then how well they do at building things. It’s often the case that great technical teams build the wrong things, but it’s also true that teams with deep insights aren’t very good at building.
B2C — post-launch, there are usually some signals like ratings and reviews. Pre-launch there are usually deep insights from surveys or interviews that set priorities. It helps when the founders are also super users, solving their own problems.
B2B & B2G — benefit more from a superuser perspective because founders who have spent time in an industry have understood the specific pain points.
Prioritizing bets is one thing, but the other portion is some evidence of execution. Can the team ship products and experiences? Can they delight customers?
Distribution is about how fast AND efficiently teams can add customers. The most efficient distribution benefits from wildly excited customers who refer other customers. This may not be immediately obvious for V1 products or MVPs, but the important question is: Customers could be strong referrers, how fast could a sale be closed?
In the case of B2C, decisions can be made fast. B2B can behave similarly to consumers too. B2G remains limited by procurement processes, which mean long sales cycles. In some cases, teams opt to work with distribution or channel partners. This tends to increase sales cycles and the cost of sales.
Other considerations for distribution include approvals or integration — i.e. any steps required before a customer can begin using a product or service.
Similar to your approach to building the product or service, we want to know about your process. Teams that can figure out where to place bets that allow them to learn quickly, tend to find the best ways to grow, profitably. Often they have some unique insights about intuitive approaches. For example, we have a team that has found that when they fly to a city and host workshops, they dramatically improve sales conversations. Another moved money from online to billboards and saw a massive increase in performance for their consumer hardware business.
Perhaps the trickiest part of it all is competition. It’s very easy to say Google or Amazon, as they seem to be able to do anything. It’s often the case though that categories emerge that attract a lot of investor interest, like scooters or augmented reality. In these cases, even promising companies can be challenging if they are late, because once companies raise a certain amount of money, it can be tough to catch up.
The other important part of competition is how you make it hard for your competitors to do what you’re doing. Investors often refer to this as a moat after the medieval fortifications. Moats can be overcome with time and resources, but good moats will require more time and resources and this means it’s likely that the universe of potential competitors will shrink. Unfortunately, being first often isn’t a moat — ask the folks who built search engines before Google or social networks before Facebook.
An alternative we like to consider is moats as reinforcing loops. These can be related to how you acquire customers or how density reduces operating costs or how more users make a marketplace more valuable. Below is an old example for Disney showing how different parts of the business interact and reinforce one another.
The best competitive discussions reveal a deep understanding of customers and technologies because founders know all the alternatives to their offering. For example, shared scooters are great, but the cost to own a scooter keeps falling as a function of battery prices. Furthermore, owned scooters aren’t speed limited in the same way, are instantly available and not subject to uncertain maintenance. In the best cases, founders have tried all alternatives as a customer and deeply understand the resulting trade-offs.
Like hardware and procurement, there are some types of risks we can take on, but we can’t do a lot of it. Regulated industries can be tricky and cities have a lot of them. Some businesses are only viable if you assume that regulations can be ”hacked” or that they’re going to change. We are not very excited about the prospect of confrontation with local government agencies — we prefer to work with them — so we avoid situations where it looks like this is likely.
IP can also be tricky, especially if there is a lot of it already. Energy storage is a fascinating area, but it’s very hard for us to assess IP claims or potential risks in areas where there is or has been a lot of active universities and especially corporate research.
Urban Us vs URBAN-X
URBAN-X is the accelerator we have built with BMW/MINI. It is designed to help prepare for seed fundraising round by focusing on specific problems related to distribution and product development. Urban Us is focused on the next steps. Often these are founders we have worked with before or teams that have gone through programs like YC or Launch. Here’s an overview of the key differences between a URBAN-X investment vs. an Urban Us investment.
Connect with us
There are a few ways to connect with the team. First, applications for URBAN-X are always open. Second, we encourage startups to follow us on social media, sign up for our newsletter or email us at email@example.com.
And although we’d love to share detailed feedback with every team we evaluate, the volume of decks and applications makes this difficult. Hopefully, this overview provides some additional insights on our point of view before you apply to URBAN-X or send us a deck. It also will give you insight into why we might pass on some promising startups.
We can’t see the future and despite some effort to find a good way to select the most promising startups, we have made mistakes and missed out on some great startups over the years. If we miss yours, we are still hoping you will go on to make our cities better. Even if we don’t benefit as investors, we hope to benefit as residents.