The question we are probably asked most frequently by entrepreneurs at Episode 1 is what are our criteria for making an investment? Of course there are lots of obvious answers – quality of the CEO, attractiveness of the space, balance within the portfolio and so on – but recent internal discussions turned up two general approaches that I’ve called Strategic and Organic. Understanding our thinking in these two areas might help potential applicants.
The first approach is very analytical and top down, hence the Strategic label. Here we like to think rigorously about the market – how big is it, how is it structured, who are the major incumbents, how much of it is going to be accessible to a new entrant and so on. In particular we want to know what secret sauce you have – insight, technology, deep contacts etc. – that will give you unusual and highly advantaged access. There are lots of markets where it is easy to identify inefficiencies or high transaction costs where technology could be transformative. However, that is entirely different from demonstrating that incumbents will not innovate themselves, or that other actors will allow access to the market, or that the cost of building a brand and customer acquisition is not prohibitive.
In the strategic approach, we want to understand what technology or IP you have built or are building, and in particular the quality of the team behind it. We are of course interested in any market traction you have, who your potential customers may be and what they think about your approach. B ut we are typically less interested in revenues at this point, although ultimately of course they are the only real proof of market success. Investments where we might take a strategic approach would include those where significant product development is needed before full market trials can start, or where a complex industry sector with significant incumbents looks ripe for software based disruption. Think large complex, B2B markets where you are going to need to build a significant defense before you can enter the war.
One of our early investments, TV Beat, is led by an experienced industry team with a strong technology vision of where analytics in the TV business need to go. We invested knowing there was work to do to build out the platform and the team before we would be ready to compete with major industry incumbents, and we remain excited by the progress what the company is making.
The Organic approach is almost the polar opposite, working from a bottoms-up perspective – we want you to show us that what you believe is actually working in practice. Here we are looking at MVP quality, revenue traction (or milestone progress – e.g. customer acquisition, free to premium conversion etc.) and growth against those milestones. We want to see you have learned what works, and can take appropriate and aggressive action to reinforce the positives. Another key concern is customer acquisition costs vs. key economic assumptions in your business plan. If you are making 50p on every customer transaction you process that is great – unless of course it is costing you £100s to acquire each customer.
As before the quality of the leadership is important, with openness, maturity and a willingness to listen to advice paramount. We like to assess the scalability of the team, and also look for defensible IP that you have or that could be created, and we look at the attractiveness of the market and potential adjacencies. But mostly we are looking at whether you have identified something that is working in practice and primarily needs resources and good execution to succeed. An example might be markets where technology creates a new value proposition for consumers or small businesses, but where significant behavioral changes are necessary for adoption. Remember, once upon a time, no one knew people would buy clothing, food, cars and even houses online!
Our most recent investment, Simply Cook, offers an exciting new way of helping busy families eat well. When they came in to meet us the team demonstrated strong customer traction and an ability to iterate around the business plan economics based upon market feedback. Our investment is helping scale business development and build out the team in order to grab a bigger share of the opportunity.
Of course these approaches are not absolute and in practice there may be a little bit of both in use. But hopefully this framework helps provide some clarity on different ways we think about your business and how you should approach communicating with us.