What I Obsess About as an Early Stage Investor

Last night I was invited as a guest to a networking event, hosted by Tablecrowd and attended by about 20 people. The format is more intimate than other networking dues I get to attend, consisting of drinks, followed by a proper dinner, closing off with a quick speech by the guest and Q&A. Given most of the audience was made of entrepreneurs, I talked about what I look for in entrepreneurs.

Here is a quick summary of what I talked about.

When investing at the early stages of a company there are two factors that matter more than anything else in my view: people and market. So in evaluating investment opportunities, I end up spending the large majority of my time thinking about them.

The reason I am obsessed with people and market is that if you get one of them wrong, or worst you get both wrong, you have limited scope for manoeuvring. While a team may be able to fix a product, or improve unit economics, it’s incredibly disruptive to replace founders when an early stage business has 12–18 months of runway, and it’s obviously inconceivable to change a market. Of course a company can pivot to address a different audience, or to a new business model or pricing strategy, we often expect them to do so. It’s rare that a company successfully pivots to a different market. It can happen, but as an investor I’d rather not take that risk.

People

So, what do I look for in founders? The answer is very subjective, a different investor will have a very different answer to that question. I found the answers to the following three questions to be highly correlated to ultimate outcomes:

  1. Would I work for this founder(s)? I find that it’s almost always a great sign when I am tempted to drop everything and join them in their journey, regardless of what they are working on. It’s a way to set the bar very high. Founders I would have worked for all had similar traits:
    • ability to inspire smart people to join by selling them a dream, a vision, and making it look achievable
    • ability to lead employees towards realising that vision, with all that leadership entails (e.g. long term strategic thinking coupled with attention to details, delegation skills, hustle, relentlessness, honesty, trustworthiness, ethics etc )
    • ability to raise capital, a necessary ingredient until the business is cashflow positive
  2. Does the founder posses proprietary knowledge? Does the founder know something that others don’t or does she understand something better than anyone else?
    • The answer to this question often revolves around the founder’s personal history and what brought her to start that business in the first place. What I am looking for is an obsessive passion for solving a specific problem. Passion often derives from a deep, visceral understanding of the problem, the market, the customers. The stronger the passion, the more proprietary the knowledge.
    • Passion is critical because when the going gets tough entrepreneurs only keep hustling through it if they are deeply passionate about what they are working on. That’s why I am typically less keen on what I would call a management-consultant approach to startup: a numerical exercise to picking an opportunity. Again, this is just a personal framework, there are plenty of successful founders who used that very approach.
  3. Are the founders working on a problem I understand? I need believe I can play a role in helping the founders achieve their vision, beyond just providing the capital. Have I got other investments in the space? Do I know people in my network who can help? Do I know potential customers?

Market

What do I look for in a market? I have narrowed it down to three tests:

  1. Is the addressable market large enough to sustain at least a £50m revenue business in a capital efficient way and in a sensible time frame, without having to make absurd assumptions on long term market share? By absurd market share I generally mean > 10% and by sensible timeframe I mean 5-10 years. Again this is completely subjective and highly dependent on the size of the fund under management and stage of investing.
  2. Is the market addressable right now? Is the timing right? One can be too early, and with limited runway the market can “remain irrational longer than you can remain solvent” (J. M. Keynes); or too late, in which case it will take much more capital to catch up with the market leaders.
  3. Has the company got a good shot at becoming the market leader? The rationale behind this is that value tends to accrue disproportionately to the #1 in a market, so as a VC you really want to back the leader, rather than #2 or#3.

 

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7 Comments on “What I Obsess About as an Early Stage Investor”

  1. […] Yannick Roux of EC1 Capital explains why people and market are the two most important factors when he evaluates investment opportunities in“What I Obsess About as an Early Stage Investor” […]

  2. Ian says:

    Great post. What do you think about the recommendations space, products like http://bestio.co ?

    • Yannick Roux says:

      I generally like it, think incumbents in the space are tired. We are investors in Twizoo.com. The question is whether you can build a very large business without owning the content, just being an intelligence layer on top of existing content.

      • Ian says:

        Interesting approach. I think one must distinguish between “owning” and “generating”. Bestio, like Facebook, does in fact own the (rights to exploit) the content. Like Twizoo it recognises the importance of Search (what people want) and social (what people say).

        Bestio aims to marry these two things – with a search driven approach, yet still have the ability to create custom Twitter type feeds (browsability, shareability). Click on this and you get the idea http://bestio.co/index.php?s=startup

  3. Yannick, great article. One thing that I’ve found in fund-raising in Silicon Valley for my online dating startup, Spritzr, is that there is a tendency for group-think around certain markets’ attractiveness. This means that independent analysis of a market, such as what you’ve outlined, is clouded by perceptions that others have. Talking to some seed stage VCs about this, they acknowledge that they have to take the prevailing VC sentiment into account, otherwise the startups that they fund will falter when it comes to raising a bigger round. So sectors are wholesale in favor or out of favor. I’m curious to know if you’ve seen the same thing.

    • Yannick Roux says:

      Great point Manshu, thanks, definitely something we think about a lot. I think what you are referring to is somewhat encapsulated into my point on market timing, i.e. picking a market right at the point of inflection, ideally before it’s obvious to everyone else, and riding the momentum. Some of the best investors actually claim to be contrarians, deliberately picking sectors overlooked by the masses.

  4. […] Two things to obsess over as an early stage investor. (sotp.me) […]


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