We are well-aware of the exact criteria we seek and aim to maintain a high level of transparency throughout our process. Our goal is to streamline your experience by openly sharing our decision-making procedures with you.
80%+ of our decision process is based on just five variables:
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Founders & Team
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Business model.
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Unit economics and growth path.
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Capital Efficiency. & Traction
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Valuation.
The initial stage in our process involves classifying your business model by analyzing the target market and revenue model. We meticulously examine various aspects such as customer demographics, preferences, and behavior patterns to determine the most suitable target market categories for your business.
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B2B, high price point. This segment involves business-to-business transactions where products or services are offered at a premium price, often catering to specialized or high-end markets.
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B2B, low price point. In this context, businesses engage in transactions with other businesses at competitive or economical price points, focusing on cost-effective solutions and mass market appeal.
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B2C, including B2B2C. This category encompasses business-to-consumer interactions, where companies directly engage with individual consumers, as well as business-to-business-to-consumer models, where businesses collaborate to reach end consumers through intermediary channels.
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Large Enterprise. This category typically refers to established companies with a substantial workforce, extensive resources, and a wide reach in the market.
The higher a target market ranks on our list, the less convincing we need to be regarding scalability, acquisition, and delivery economics. This is crucial for ensuring a successful revenue model implementation. We categorize our revenue models into the following categories to streamline our approach:
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1. Subscriptions: consider acquisition expenses and churn rate.
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Two-sided marketplaces: factor in acquisition and transaction metrics.
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High recurring transactions: consider repeat purchasing metrics.
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Low recurring transactions.
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Affiliate programs and advertising.
The higher a model is on this list, the lower the traction we need to see for a given valuation. As a rough guide, low recurring transactional revenue is worth about half as much as subscription (at a low churn).
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After the business model, we look at traction. Traction does not always mean revenues and firm contracts starting within 60 days. We look at LOIs or verbal commitments. 1-2 years projections based on solid market studies and comps.
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We next consider this traction in the context of unit economics and the growth path.
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Our database of our portfolio companies and thousands more applications mean we know the typical unit economics and growth trajectories of companies at this stage across our business model categories. If your metrics on these dimensions are higher, we need to see less gross profit. If they’re lower, we need to see more.
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The final consideration before valuation is capital efficiency. Our model places a high premium on companies that consume less capital. These companies can do more with less and therefore have a better chance of surviving and achieving a sustainably growing business.
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We judge capital efficiency in terms of how much money you’ve previously taken from investors, your historical cash burn, and your projected cash burn. Beyond a modest level of capital intensity, we’re usually not willing to invest at all. Below that threshold, the lower your capital requirements, the less traction we need to see.
At the conclusion of our comprehensive analysis process, we integrate all the pertinent factors to derive a valuation that aligns with our investment strategy. It's noteworthy that a significant portion, specifically 90%, of our investments are allocated within the valuation range of $6M to $10M. Furthermore, it's worth mentioning that the valuation is directly correlated to the Monthly Recurring Revenue (MRR), which scales in accordance with the factors elaborated on previously.
