The following is the first blog post of a three-part series from Greg Phipps, our managing director of investment here at Innovacorp. Stay tuned... Next Friday, he’ll tell you about the "known-unknowns" and "unknown-unknowns" that can delay your start-up from securing its VC investment.
It may seem like an unlikely metaphor, but we can’t help but think about raising a child when it comes to launching entrepreneurial ventures.
Like parenthood, starting a new company requires planning and preparing; establishing a “nursery,” or office space at an incubation facility or elsewhere; leaning on a supportive network of friends, family and resources; and building a team to “raise” the bundle of joy. Both journeys may also require significant funding for the birth and growth phases.
Founders, particularly those pursuing entrepreneurship for the first time, frequently tell us they don’t know what to expect during the fundraising process – an exercise that is often foreign to them, yet so critical for assembling a team and other resources to launch a new knowledge-based company. Sources of equity investment is not the focus of this post but, to summarize, an entrepreneur has several options for sources of start-up capital – friends and family, angel investors, institutional VCs, corporate investors, current or prospective customers, and any number of emerging crowdfunding platforms. These potential investment sources often differ substantially when it comes to how you engage them, the process of securing a commitment, the structural and legal requirements of a transaction, and the timeline involved.
We’d like to provide entrepreneurs and prospective portfolio companies with some insight into what you might expect when engaging with Innovacorp in the context of a potential investment. While we can’t speak for other venture capital funds/managers, we believe our process mirrors that of many others.
Innovacorp, like any other institutional venture fund manager, has a somewhat structured process and approach to evaluating potential investment opportunities. Decisions we make are based on a combination of objective and subjective criteria. Objective criteria include evaluation of the technology platform; intellectual property considerations; size and growth rate of the addressable/available market (Total Available Market, or TAM); customer segmentation; competitive landscape and differentiation. The more subjective side of the evaluation often focuses on the people involved.
It’s About People
The majority of venture investors will cite “people” as the most important metric by which they evaluate an investment opportunity and consider that criteria the greatest predictor of success. VCs will do a deep dive into evaluating the entrepreneurs and management team; their respective and collective experience in launching and managing a start-up; relevant experience in the company’s target vertical or sector; and – perhaps the most subjective measure – whether there is a “connection” with them, as people and potential long-term partners.
The latter is an often overlooked yet critically important part of the equation. If we assume we will truly be a stakeholder/shareholder partner with founders for, say, five to eight years, we want to make sure the relationship starts at a place founded on mutual personal and professional respect, a shared vision for business performance, milestones, objectives and outcomes, and an agreed upon path to exit and return on investment for all shareholders. If a management team has gaps in experience or has technical or operational deficiencies, we want to identify those upfront and reach an agreement on how and when the gaps will be addressed.