As a venture capitalist, you may have to deal with a large number of startups competing for your attention and funding. How can you effectively evaluate multiple startups at once, without compromising on quality and speed? Here are some tips to help you streamline your VC due diligence and valuation process.
Before you dive into the details of each startup, you need to have a clear idea of what you are looking for. Define your investment thesis, your target market, your preferred stage, and your expected return. Then, create a checklist of criteria that align with your goals and values. For example, you may want to assess the problem-solution fit, the product-market fit, the team, the traction, the scalability, the competitive advantage, and the financials of each startup.
In my experience, as CEO of one of the most relevant EU startup hubs and board member of VC and investment companies, I am convinced that having a clear set of criteria will help you evaluate startups in a systematic and efficient manner. Your investment thesis, target market, preferred stage, and expected return will guide your assessment. It's important to create a checklist of specific criteria that align with your goals and values. For example, consider evaluating the problem-solution fit, product-market fit, team, traction, scalability, competitive advantage, and financials of each startup. These criteria will provide a structured way to compare and contrast the startups you are evaluating.
Scorecard/Rate the following: Team: experience, expertise, track record, ability to navigate challenges, raise capital. Uniqueness and value proposition of each startup's product or service. Financial: revenue streams, cost structures, and potential risks. Expected return, risk tolerance, industry preferences, and time horizon. Customer Traction and Validation: PMF achieved ? Intellectual Property References: customers or other investors who may have experience with the startups
Assessing multiple startups actually provides comparative data crucial for VCs. To really solve a large problem, you need to assess a wide range of solutions to be sure that the one you chose is truly the best one at the time. Specifically, having diverse solutions for a single problem helps evaluate strengths, weaknesses, and market potential, aiding in pinpointing the most promising investment. This approach offers a comprehensive view, making it easier to identify the standout solution worthy of backing among various contenders.
Defining the criteria and your investment thesis is key to go faster in developing a portfolio. Understanding the trends and the hidden value in the investment opportunities is key for maximize that value. To distinguish between founders followers and real pioneers, as well as good practice and consistency not just because there seems to be the most marketable option in the sector is key for be part of real game changers companies, and unicorns.
I think it is important to really know what you want and understand why you want that. Having a clear set of expectations (or we might call criteria) then follow with a tracking and screening procedure. You can also consider having your criteria listed down by prioritization. Some criteria you may want to consider: sector, stage, problems, technology, team, market, etc. Besides, having startups' expectations (fundraising amount, type of investors they are looking for, their growth pace, etc.) listed down will also help a lot in evaluating.
Once you have your criteria, you can use them to screen and prioritize the startups that match your profile. You can use online platforms, databases, or networks to find and filter potential deals. You can also ask for referrals, recommendations, or introductions from trusted sources. Then, you can rank the startups based on your level of interest and fit. You can use a simple scoring system, a matrix, or a funnel to organize your pipeline.
Using screens is essential to apply the standard you want to set, so make sure you actually understand how to apply the screens!
Most VC rely on inbound flows (startups they are introduced through their network or applying directly). However, a growing trend is "outbound scouting", sometimes on the long term, through which investors actually follow companies as from their inception and monitor their progress. Engaging in outbound scouting requires the use of proper scouting tools that find relevant candidates not on firmographics and financials, but on actual activities of startups. These tools heavily rely on AI (NLP, now LLM) to identify, validate and engage with the best companies out there - even those from unchartered territories.
In an article I wrote for SiGMA magazine recently I have advocated for placing an emphasis, in evaluating startups, on the founders' managerial skills as much as on the novelty of the idea itself. Leadership and management abilities within the founding team can be as critical as technical expertise in most cases as effective management and leadership are critical to transforming an idea into a marketable product.
Prioritizing is always and essential task in life, isn’t it? And when it comes to startups it is fondamental to utilize your predefined criteria to screen and prioritize the startups that align with your investment goals. You can use various resources such as online platforms, databases, or networks to discover potential deals. Additionally, seek referrals, recommendations, or introductions from trusted sources to ensure you have a high-quality pool of startups to evaluate. Once you have a list of potential startups, rank them based on their fit and level of interest. Consider using a simple scoring system, a matrix, or a funnel approach to organize and manage your pipeline.
Effectively evaluating multiple startups at once involves a well-structured screening and prioritization process. From my experience, start by quickly screening each startup against basic qualifying criteria such as industry, stage of development, and financial health. This initial filter helps in narrowing down the pool to those that meet your basic investment thresholds. Next, prioritize the filtered startups based on more detailed criteria, such as innovation level, market potential, team strength, and scalability. This two-step process of screening and prioritizing allows for efficient handling of a high volume of startups, ensuring that time and resources are focused on the most promising opportunities.
After you have a shortlist of startups, you need to conduct more in-depth research and analysis to validate their claims and potential. You can use various sources of information, such as pitch decks, websites, social media, blogs, podcasts, reviews, articles, reports, or industry data. You can also use tools, such as surveys, interviews, surveys, or simulations, to test the assumptions and hypotheses of the startups. You can also use frameworks, such as SWOT, Porter's Five Forces, or Lean Canvas, to evaluate the strengths, weaknesses, opportunities, and threats of each startup.
Once you have narrowed down your list you may want to conduct more thorough research and analysis on each target. This step helps validate the claims and potential of the startups you are considering. I often prefer to use information from multiple sources pitch decks in particular, websites, social media (third parties only), reviews, articles, reports, or industry data. Additionally, consider using tools like surveys, interviews, surveys, or simulations to test the assumptions and hypotheses of the startups. This research and analysis process will provide a deeper understanding of each startup's viability and potential for success. Especially through comparison of the different results you get.
In my book, research and analysis sum up to a proper due diligence process. Due diligence is a thorough investigation and analysis conducted before committing to an investment opportunity. It aims to review details, risks, and legal exposures (such as IP ownership issues and challenges or litigation involvement). Venture capital firms often conduct these assessments in-house, while angel investors rely on their expertise or hire personnel as needed. Robust due diligence is crucial to minimize risks tied to hype cycles. Assessing technological foundations, market fit, scalability, and regulatory compliance in startup enterprises is key and is mostly the very factor that distinguishes a bad investment from a sound investment.
As you gather more data and insights, you need to compare and contrast the startups to see how they stack up against each other. You can use benchmarks, metrics, or ratios to measure the performance, growth, and efficiency of each startup. You can also use methods, such as multiples, DCF, or IRR, to estimate the valuation and return of each startup. You can also use criteria, such as alignment, fit, risk, or impact, to weigh the pros and cons of each startup.
There are a couple of great ways to evaluate startups both internally, and externally. 1. You can group startups with similar business models, industries, or characteristics. This allows the investor and the startup to increase efficiency with addressing common challenges and opportunities. 2. Another way could be partnering with enterprise / Fortune level organizations who could serve multiple verticals and horizontals and be profile customers for the particular startups where there could be multiple business cases. These larger companies have wide capabilities to evaluate startups all at once in buckets. #startups #venturecapital #vc
Comparison is fundamental to free our mind from false myths or incorrect first impressions; you should gather as much data and insights about each startup as possible. Consider using benchmarks, metrics, or ratios to measure their performance, growth, and efficiency. This will help you objectively evaluate each startup and identify their strengths and weaknesses. - Additionally, using methods like multiples, DCF, or IRR can assist in estimating the valuation and potential return of each startup. This will provide you with a quantitative measure that can be compared between the different startups. - Finally, take into account criteria such as alignment, fit, risk, or impact to weigh the pros and cons of each startup.
In the post ZIRP world, deals are abundant and often overlapping as far as value propositions & target customers. We use a matrix of metrics, benchmarks, ratios and formulae (DCF, IRR, ROI etc) to paint a multidimensional picture of an investment opportunity. At the outset of a compare/contrast exercise, we focus on key singularities if we feel they are transformative- which reduces the cohort early in the process. Since we are seed investors, we also zoom in on metrics relating to quantitative & qualitative aspects of customer & market traction that imply scalability. Finally, we emphasize alignment with our corporate LPs because of the unfair scaling advantage this can offer a portfolio company.
Before you make a final decision, you need to validate and verify the information and assumptions of the startups. You can do this by conducting due diligence, which is a systematic and thorough investigation of the legal, financial, technical, and operational aspects of each startup. You can also do this by conducting reference checks, which are conversations with the customers, partners, employees, advisors, or investors of each startup. You can also do this by conducting experiments, which are small-scale tests of the product, market, or business model of each startup.
The Validation stage of diligence is one of the most important steps. Assuming a deal makes it to this point of the process they should be willing to pull back the curtain and give you access to their data room, financial projections / modeling, cap table, lead investors etc. all of which are pieces of the puzzle that will give you a cohesive picture of what to expect for the future of the company. Don't rush this part of the process. Slow is smooth and smooth is fast when it comes to diligence. Better to do it right the first time rather than having to go back and double check because you were too hasty in your initial diligence and validation.
Create a best case and worst case scenario on a given/selected target customer. 1. Linear part: add different segments after having multiplied with ARR ( recurring revenue). 2. Non-linear part: take into account time to hit critical-mass in each segment of customer that can unlock new revenue stream. Benmark: run benchmark of each category of startup at same stage ( e.g pre product-market-fit) to come with with prevailing Highs and lows in market. This serves as en envelop for evaluation. 3. Founder and culture check. Interview customers and employee before making final call. The culture of startup should align with mission and values and should be reflected in each of its transactions.
After you have done all the evaluation and validation, you need to communicate and negotiate with the startups that you want to invest in. You can do this by sending term sheets, which are documents that outline the key terms and conditions of the deal. You can also do this by discussing the valuation, the equity, the dilution, the governance, the milestones, and the exit strategy of each deal. You can also do this by building rapport, trust, and alignment with the founders and the team of each startup.
For a startup with well-thought investment strategy and a precise grasp of fund allocation - should be a deal breaker to agree to an investment amount lower than requested. Even by just 5-10%. It's crucial for startups to secure the funding they genuinely need to execute their vision successfully, so it might be helpful to include such a question for a late negotiation stages.
“Evaluating multiple startup’s / deals simultaneously is what we are paid for “ The trick is to keep all related data on the table and stick to one deal after another. Emotions play a role and we digress on the deal on the table because of the last deal we evaluated. Example if the management team in last evaluation was bad, the current deals team looks good comparatively. I personally like to make notes ; hand written and then I refer each page prior to signing off.
Venture capital transcends the linear 'deal factory' model suggested by AI for this article. Our process is deeply iterative and relationship-focused, hinging on the diverse expertise of our team in finance, tech, and operations. Our team's collective experience allows us to 'play positions' effectively to unravel the complexities of every deal. We recognize that startups evolve over funding rounds, often revisiting and reassessing them multiple times throughout their journey. Building and maintaining relationships with entrepreneurs is key, as initial rejections may evolve into future opportunities. This dynamic, long-term engagement approach is critical in the ever-changing landscape of startup investments.
I'd add External Advice: Consider getting external advice from industry experts, technical consultants, or financial advisors to provide an independent assessment. Many times, we are biased by our previous experiences and subjective preferences.
Be organized and use tools to help juggle several deals at once, with many context switches between them in a typical day. A CRM system that is continuously updated can help with quick and clean context switches. However, sometimes it's a surprise call on the mobile while driving, so it's important to remember the main parameters/issues/discussions, at least for the current deals in progress. Regardless of the circumstances and tools chosen, the founder/CEO I'm talking with deserves a clear recall of their specific company, status, and deal details each and every time we talk. In the odd occasion I don't remember something, I apologetically admit it and ask for the details again.
At 77 Partners, we run a 12-week program, enabling us to provide upfront value to founders at no cost or obligation, and to assess ten high-quality startups simultaneously. By the end of the program, the process of deciding which ventures to fund is simple.