You're navigating economic uncertainty in venture capital. How do you choose which startups to invest in?

Every economic downturn presents not just challenges but also significant market opportunities. The recent COVID-19 pandemic, for instance, highlighted new prospects in e-commerce, fintech, remote working, and other sectors. By comprehensively analyzing market dynamics, industry shifts, and evolving customer preferences, investors can predict which sectors will be directly or indirectly affected. This foresight enables them to identify relevant startups that align with these shifts, positioning themselves for mid to long-term growth as markets mature.

From my experience, healthcare and education start-ups are prime examples of showcasing the ability to adapt quickly and address critical market needs. During the COVID-19 pandemic, healthcare companies went on to build telehealth platforms that aided the digital transformation of their services. EdTech companies that provided a digital ecosystem to academic institutions to seamlessly integrate their courses and conduct lectures/tests online, showcased non-linear growth. Thus, the best of companies are built in the worst of markets. As investors, we want to back founders who have the ability to take advantage of such situations by keeping consumers at the center.

To navigate economic uncertainty in venture capital and choose which startups to invest in, prioritize market fit. Assess whether the startup’s product or service addresses a significant, enduring market need. Evaluate the target market size, growth potential, and competition. Ensure the startup has a clear value proposition and a deep understanding of its customers. Analyze the startup’s ability to adapt to market changes and economic conditions. By focusing on market fit, you can identify resilient startups with strong growth potential, even in uncertain economic times.

In times of uncertainty, the importance of market fit becomes paramount. Focus on startups that address a real, persistent need in the market. These companies should have a deep understanding of their target customers and offer products or services that are indispensable rather than merely nice to have. Additionally, a startup's ability to adapt to changing market conditions and customer preferences is crucial. This adaptability is a key indicator of long-term viability and success, ensuring the company can navigate challenges and seize opportunities as they arise.

One thing that is important to mention: VC-backed company represents around 50% of US IPOs. Meaning that VC is not a trend, its is a shortcut to national development and job creation. Other thing that is important to mention: VC have around US$ 300 billion in dry powder (resources from the limited partners waiting to be allocated). So, founders: VC is not dead. The right solution, at the right valuation will always have space (currently, I see see biotech, climate and cyber as hot topics - always AI-powered!)

One of the VC mantra's is to invest in a good team". But, what is a good team? I would say that technical expertise is a must for each function (CFO, CTO, etc). but there are other things to consider: - How long they know each other / have been working together? - the set of soft skills is complementar? - the cap table / options pool is enough to make sure the current team will remain together? - IS there any "no compete"clause for any one of the leaders? Etc

Founding Team: Assess the founding team’s experience, expertise, and track record. A strong, cohesive team with complementary skills is crucial for navigating uncertainty. Execution Ability: Evaluate the team’s ability to execute their business plan. Look for past achievements, resilience, and adaptability. Leadership: Consider the leadership qualities of the founders. Strong leadership is essential for guiding the startup through challenging times. Team Dynamics: Ensure the team has good chemistry and works well together. Effective collaboration and communication are key to success.

Consider the Apostles, whose diverse skills and unity under Jesus' leadership propelled the spread of the Gospel. When choosing startups in economic uncertainty, prioritize those with adaptable, experienced, and cohesive teams. Look for a blend of complementary skills, a shared vision, and a proven track record, as these qualities will help them navigate unforeseen challenges and pivot as needed to stay on course. Their collective strength and unity will be the foundation for enduring success. #divineintervention #gabenfreude #MentalHealthAwarenessMonth

VC is obviously about risk, but controlled risk. A bootstrapping startup that low costs (burn rate) can last much longer without new fundraising -the so-called dromedaries im opposition to the fancy unicorns. Also a company with very solid margins should e able to generate a positive cash flow for long periods, reducing the need of external funding and protecting the equity (thus, being more attractive in future rounds).

Burn Rate: Examine the startup’s burn rate and runway. In times of economic uncertainty, a lower burn rate and longer runway are advantageous. Revenue Streams: Analyze the current and potential revenue streams. Multiple and diverse revenue streams can provide stability. Profitability Path: Assess the startup’s path to profitability. Understand their business model and how they plan to achieve and sustain profitability. Financial Metrics: Review key financial metrics such as cash flow, margins, and unit economics to ensure financial health and viability.

Think of Joseph in Egypt, who wisely managed resources during years of plenty to prepare for the famine. Similarly, in an uncertain economy, prioritize startups with robust financial health and strong unit economics. Look for those with a clear path to profitability and effective burn rate management, ensuring they have a longer runway to adapt and survive market downturns. These financially prudent startups will provide a cushion against instability, much like Joseph's careful stewardship preserved Egypt. #divineintervention #gabenfreude #MentalHealthAwarenessMonth

Investing in SaaS companies like Zoom are a great example of showcasing scalability potential. During the pandemic, they were able to add thousands of users to their platform without incurring significant cost increases. Such businesses undoubtedly become very desirable acquisition targets.

Business Model: Evaluate the scalability of the startup’s business model. Ensure it can grow efficiently with increased demand. Technology and Infrastructure: Assess the startup’s technology and infrastructure to determine if they can support rapid growth. Market Penetration Strategy: Understand the startup’s strategy for market penetration and expansion. Look for clear, actionable plans for scaling operations. Operational Efficiency: Evaluate the startup’s operational efficiency and ability to scale without disproportionately increasing costs.

Consider the parable of the mustard seed, which grows into the largest of garden plants, symbolizing immense potential from small beginnings. In uncertain times, seek startups with high scalability potential, where growth does not entail proportional cost increases. These ventures not only promise substantial returns but can quickly expand under favorable market conditions, making them attractive acquisition targets and ensuring multiple pathways to success. #divineintervention #gabenfreude #MentalHealthAwarenessMonth

Reflect on Nehemiah, who rebuilt Jerusalem's walls with strategic planning and defenses against potential threats. In venture capital, especially during economic uncertainty, implement risk mitigation strategies by diversifying your portfolio across various sectors and stages. Seek startups that clearly understand their risks and have robust contingency plans, ensuring they can proactively address threats and navigate tough times with resilience. #divineintervention #gabenfreude #MentalHealthAwarenessMonth

Risk Assessment: Identify and assess the key risks associated with the startup. This includes market risk, execution risk, financial risk, and regulatory risk. Mitigation Strategies: Ensure the startup has clear strategies to mitigate identified risks. This can include contingency plans, diversified revenue streams, and robust legal compliance. Resilience and Adaptability: Evaluate the startup’s resilience and adaptability to changing market conditions. Look for evidence of pivoting successfully in the past. Diversification: Consider how investing in the startup fits within your overall portfolio strategy. Diversifying your investments can help spread risk.

Venture is a long-term asset class - you don't trade in and out of it tactically. My investment criteria, thus, don't shift with the tides. Throughout cycles, I stay disciplined with executing on my thesis and back the highest caliber founders I meet who are financially responsible and are solving real pain points in large industries. Market volatility and uncertainty today mean better entry price points for disciplined venture investors.

There's always going to be economic uncertainty. In fact there always is. When everyone is afraid and not making investments this is when you will find the best companies and the best deals. Look for companies that can get to CFP based on filling their current round. Look for founders who have grit and no quit. Ones that will figure out a way to survive even without you money. Invest in them.