What are the best indicators for identifying a startup that is a good fit for your investment portfolio?

Investigate the specific pain points or unmet needs of the target audience that the startup addresses. Startups that effectively alleviate these pain points are more likely to attract and retain customers.

The name of the game in venture capital is to identify and back ventures that have the potential to turn into unicorns. It is these types of ventures that yield non-symmetrical returns, returning the entire fund. The most basic condition for judging whether a venture has the potential to become a unicorn is the potential market size. No matter how brilliant the product is, if the total addressable market is small, it limits the potential growth of the venture. However, this is not so cut and dry because ventures often create new markets that don’t yet exist, or start in a niche market but manage to expand into adjacent and much larger markets. Visionary founders excel at captivating the imagination with a blue-sky vision.

When considering investments in early-stage ventures, I would suggest having a cautious look at the market. Typically, market data struggles to reveal potential disruptions, and, if there is enough data to identify one, the big players have seen the opportunity a long time before us and jeopardize the venture’s success. Consequently, I prefer a qualitative approach offering empirical data (focus group, feedback from potential customers etc.) rather than a quantitative approach (market data). Early-stage ventures' success heavily depends on opportunities that no one else has seen and that cannot be identified by quantitative analyses.

For a seed round, it is realistic to expect that there is no proven PMF, but an assumption based on facts and traction. For series A, it is essential to see a demonstrable, proven PMF.

Address the scalability potential of the startup's product or service. Startups should also demonstrate the ability to scale their operations efficiently to capture a larger market share.

Finding product-market fit takes time and often involves a few hard pivots. Early-stage VCs understand that the current product they are investing in is highly immature and is very likely to morph over time. By the time a venture approaches Series A/B, there's a growing expectation to see demonstrable PMF. Typically, the purpose of these rounds is to pour gas on the fire to scale quickly, which usually works after a venture finds product-market fit.

The most important aspect for product-market fit lies more in its capacity to evolve than its current settings. When entrepreneurs are performing their proof of concept, there are little chances that their offering will work from the first time. However, quickly entering the market (without waiting to have a perfect offering), capturing in real-time the signals sent by the market, and promptly adapting, significantly increase the chance of success. Consequently, I look more at entrepreneurs’ ability to adapt their model rather than the model itself.

There are no doubts that, for early-stage ventures, the entrepreneurial team matters more than the business model. Research has shown that the most important factors include previous experience in the field of the venture, previous experience as an entrepreneur, ability to receive feedback, and resilience. Traditionally, venture capitalists invest more in entrepreneurs who look like them (due to psychological bias). For instance, this occurs with entrepreneurs having fancy degrees and those worked for prestigious consulting firms. However, it is unclear whether those profiles succeed more than others.

Early-stage ventures that have passed the proof of concept stage and show traction are significantly less risky than those with no traction. If recurring growth appears as well, it looks even more attractive. As a good old-fashioned business manager, I like to review with the entrepreneurs the divergences between actual and original milestones. It gives me a sense of whether entrepreneurs have their business under control. I also try to ensure the reality and the accuracy of these numbers: too many investors have been fooled by the “fake it until you make it” approach. Deeper due diligence on the numbers never hurt.

SWOT is a bit outdated but still represents a good tool to start the discussion about a business model; it gives the big picture. The 5 Forces model does not get old and offers an in-depth view on a venture: it gives the strategic context. The Blue Ocean canvas represents a great approach as well and offers unique angles on what the venture is trying to achieve; it gives the strategic positioning. I usually ask entrepreneurs to prepare this canvas in the pragmatic form of a competitive landscape: What is the competition doing that the venture will not do? Why? What is the venture doing and not the competition? Why? This competitive landscape allows investors to get a clear picture of the venture in 10 seconds.

Corporate VC differs from traditional VC in identifying start-ups for strategic investments. Some differentiators are- 1. Deal Structure: Equity investments are often accompanied with clauses that enable the CVC to completely acquire the start-up in the future or integrate the start-ups product into the parent company's core business. 2. Talent Acquisition: Sometimes, founders from portfolio companies come over to the parent company as employees, which gives the founders an exit opportunity that doesn't rely on additional fundraising. 3. Strategic Partnerships: CVCs often invest in multiple vendor companies from within their network to promote mutual growth. Compatible/complementary businesses benefit from being in the same network.