You're investing in startups in emerging industries. How can you refine your risk evaluation process?

Beyond traditional research, engage directly with potential customers and industry insiders to gain grassroots insights. Consider conducting focus groups or surveys to validate market assumptions. Additionally, explore niche markets within the broader industry that may offer untapped potential, allowing the startup to carve out a unique space.

Newer and emerging industries often have underdeveloped market research methods which means two things: 1) Adjacent market research will be helpful but not totally telling 2) Intuition and a deep understanding human behavior is essential to making investment decisions There was no market research about the demand for cars in 1899

Check out how the startup handles unexpected changes and pivots when new trends pop up. See if they’re experimenting with new ideas or adjusting their strategy to stay ahead. Their knack for adapting and trying out different approaches can show how well they’ll handle future surprises and seize new opportunities. It’s a good way to spot if they’re not just reacting to the market but actively shaping their path.

Don’t overthink TAM on day one, as an early stage company. Your addressable market is always likely to grow and evolve over time. Rather than trying hunt down measures of theoretical market size, take a first principles approach to understanding the economic energy that the product can unlock. That’s the best approach to building a compelling narrative for investors.

To refine your risk evaluation process when investing in startups in emerging industries, begin by conducting deep market research to understand the industry landscape, trends, and potential disruptors. Assess the startup’s technology or product for scalability and its potential to address significant pain points or market needs. Evaluate the experience and track record of the founding team, focusing on their ability to navigate the unique challenges of emerging industries. Implement rigorous scenario planning and stress-testing to anticipate and mitigate possible risks. Engage with industry experts and advisors to gain additional insights and validate assumptions.

As an early-stage investor, my primary focus is on the co-founders and the team they’ve built. Because a) we’re not just looking for a great investment; we’re seeking exceptional partners who can deliver outstanding returns and create a meaningful impact for both of us. b) a billion-dollar idea is not enough, it needs to be mended and requires founders who are open to learning, resilient, coachable, strong leaders, and ready to grow alongside their team. I also pay close attention to the dynamics among the co-founders and how their backgrounds and skillsets complement each other.

Early on, it’s tempting to focus on revenue. And the first dollars into the business do a lot to validate the idea. However, equally important is spend. Showing a breakdown on spend, so investors can understand what you are paying for customer acquisition or external support, is a crucial part of the due diligence process.

Market demand and the product viability and feasibility of technology is critical to understand whether the startup will succeed or not. Its important to understand the market landscape first and see if the technology really has a 10x advantage over its competitors or just good to have. One classic case is Google Glass which was technically advanced but didnt solve any real problem in the market, hence it failed. Understand the risk in the following order - Problem solved - Market demand potential -Maturity of the technological solution -Financial viability. When all these factors are considered, you have high probability of selecting the right startups as a VC.

Go beyond customer feedback by assessing the product's adaptability to technological advancements and shifting consumer preferences. Investigate how easily the product can integrate with or complement other emerging technologies. Consider the potential for creating an ecosystem around the product that could foster brand loyalty and expand its market reach.

Paul Graham of Y Combinator once said a good early stage growth rate is 5-7% a week. If a startup can hit 10% a week, they’re doing exceptionally well, but if they can only manage 1%, it’s a sign that they haven’t yet figured out what they're doing. I made this my benchmark to assess product market fit. It won't work for everyone or every industry, but I think it's essential for emerging technologies that rely on a high adoption rate.

Instead of only focusing on compliance, consider the startup's proactive approach to regulatory changes. Are they building relationships with regulators or participating in industry advocacy groups? Evaluate their ability to influence or stay ahead of policy shifts, which can be a significant competitive advantage in highly regulated industries.

Expand the exit strategy beyond traditional routes by exploring options like strategic partnerships or international expansion that could increase the startup's attractiveness to acquirers. Additionally, consider the startup's ability to maintain independence and grow sustainably without relying solely on an exit, which could offer long-term value for investors.