Many new entrepreneurs often ask: what do investors look for in startups? It’s a great question. Every firm has its own thesis on what it looks for when investing in startups. Some firms focus on a particular industry, like security; others a type of technology, like blockchain; still others only invest at a certain stage in the startup lifecycle.
When we meet a new startup there are a lot of factors that go into our decision on whether to invest or not. In general, we only invest at the earliest stage through Series A startups. We’re also primarily focused on business to business (B2B), subscription, Software as a Service (SaaS).
But even that criteria is fairly broad. Within those types of companies there are typically two areas, however, that we primarily focus in on:
We take a market-in approach to investing. What does that mean? Well, it does not mean that we simply look at Total Addressable Market (TAM). That is an element but we’re not just going to invest in some cloud company because we know that the worldwide public cloud services market is projected to grow 17.5 percent in 2019 to total $214.3 billion, up from $182.4 billion in 2018.
Instead, we evaluate a company’s strategic value in how it would fit into a market and competitive landscape. Founders are often very product focused, which is a good trait. However, if you don’t look outside your four walls then you will miss what other players are doing and how they are innovating. Often, competitors are doing similar things. So it is important for us to know all of this and help the companies we work with think strategically around collaboration and differentiation.
When it comes to differentiation we’re always looking for the competitive moats. Basically, that just means what are you doing that would be very difficult to replicate, i.e. what kind of defense are you building that makes it difficult for an enemy to storm your castle.
The market-in approach also offers us a gut check of an entrepreneur. By knowing the players and the opportunity in the market, plus the experience we have building companies, we can usually make an assumption of what sort of opportunity exists. There are a lot of ways an entrepreneur can be successful. Not every startup needs to be a unicorn. Not every startup can be a unicorn. It is important that an entrepreneur understands that. Our market-in evaluation may lead us to the conclusion that this entrepreneur is building a nice business that may be acquired by a strategic down the line for $50 million. Given a lot of factors this opportunity may excite us. But if the entrepreneur thinks he or she is building a billion dollar company and won’t adjust that perspective then it might not be a fit.
Now it would be foolish of us to view startups through this lens but not hold ourselves to the same criteria. When launching York IE we looked around at the venture capital market. This is a market that is competitive.
Yet we saw a real market opportunity to turn it on its head.
As Kyle has written about previously, the current VC model is broken and not always advantageous to entrepreneurs. We wanted to change that. Doing so we took on considerable operating risk by not having revenue from management fees. But to do something important, you have to experience pain. And you need to think creatively. That is why we’re differentiating ourselves through:
- Taking no management fees
- Building product
- Doubling down on our strengths as go to market experts in B2B SaaS
We’re not alone in seeing this opportunity and other players have popped up in the space. We continue to watch them and evolve our offering to provide the most value to entrepreneurs as possible.
At the end of the day to fulfill opportunity you need a team to execute. That is why we put such a priority and focus on the people behind the startup idea.
We prioritize certain biographical details like:
We love multi-time founders. They have been through the wringer and know exactly what they’re getting into. That experience adds tremendous value to future startups.
We also look for diversity of experience. People of different ages, genders, races, geographical locations and socioeconomic backgrounds have unique perspectives on life. They look at problems through a unique lens, which is how true disruption happens.
Entrepreneurs need to have a vision for what their company can become. But looking off into the great beyond and seeing something isn’t difficult. It is knowing how to actually get there that is what separates successful startups from the ones that fail. We lean heavily toward entrepreneurs who are able to articulate a clear and compelling vision and then have a path of execution to get there.
If you don’t have experience, you need to be coachable. The entrepreneurs we work with tend to be sponges who learn quickly. You can make suggestions and recommendations and they hear them, leave you and come back better than before. I don’t mean they just do whatever we say. But they listen to their advisors, absorb the information, and then make the best decisions possible for their company based on all of that insight.
As an investor and advisor the last thing you want to feel is ignored. Time is the most precious commodity and if someone feels like their time is being wasted or not valued, they usually pull away. We’ve worked with entrepreneurs in the past who just never listened and we didn’t want to sit there and watch them make the same mistakes over and over. So we minimized our relationship with them.
Which leads to the final, and perhaps most important, criteria…
When deciding which startups to invest in we ask ourselves a simple question: when this company becomes successful will we be pumped for these entrepreneurs? And when they have their big IPO/acquisition dinner, will we want to attend?
If all the other answers are yes but we can’t personally root for the entrepreneur we’ll back off. This may hurt us someday on a particular startup but we’re OK with that.
When we say we believe in everyone of our entrepreneurs and would do anything for them, we mean it. And that’s most important to us in the long term.