Welcome to a sneak peek of our Venture Capital Analyst Fundamentals module!

If you've ever wondered what makes a startup stand out to investors, you're about to get a glimpse into the key elements that professionals look for.

In this preview, we'll touch on the basics of market analysis, product potential, the importance of a capable team, and the crucial metrics that signal a startup's promise.

This is just the beginning of learning how to sift through the market to find those gems with the potential to shine. Are you ready?

What do you look for in a Startup?

Okay, so now you must be an expert in the market you’re looking at, and should be up to date with all the trends happening in your industry want to explore.

Now that we know the market, the next thing we need to understand is what do we look for when see see a startup?

Let’s hear from Lauren Capelin who was a Principal at Startmate:

There’s no right answer here - It varies, depending on the stage of the company and the thesis of the investor.

Picking winning companies is more art 🧑‍🎨 than science 🔬. The key domains each fund will look at are Market, Product, Team and Metrics.

📊Market

What is the market they are playing in? Who are the key players? And how well-positioned is the startup is to succeed in this market?

Questions we can ask when thinking about the market:

• What is the market size? (i.e., How big is this market? What are the trends in this market, and how is this startup poised to obtain market share?)
• Does the team understand the market they are entering?
• Who are the key players? (i.e., Are there significant barriers to entry into the market? How well-placed is this startup to enter the market?)

Product and the problem being solved

What is the product itself? What is the problem being solved? What is the startup doing differently to other companies in the market? Why should this problem be solved now?

Questions we can ask when thinking about the product and problem:

• What is the problem being solved
• How much of a problem is it?

Consider the Vitamin vs Painkiller metaphor: A Vitamin Product is nice to have, while a Painkiller Product is a need to have.

• Does this company solve the problem? (i.e., Do they have a unique insight on the problem they are solving? How does their product solve the problem? Is it a sufficient solution? What are their customers saying?)

📚 Usually the first question I ask is, what inspired you to invent this product? I’m hoping that it’s based on a personal problem that founder had, and this product is the solution to that personal problem. - Ron Conway

🫂Team

The most important factor in any early-stage startup is the founder and the team. Why are the founder and the team the right people to solve this problem and run this startup?

The most important factor in any early-stage startup is the founder and the team.

• Who are the founders? Who is on the team?

I.e. How will their background lend itself to building the startup in their market? Are they able to execute quickly? This can be seen either through their past ventures or through their progress in their current startup. Do they have a competitive advantage in the space? Are they coachable?

🔢 Metrics

How are they performing in line with their company’s stage and size? Do they have Product-Market Fit? This is more applicable to later-stage startups.

Let’s look at a very common metrics a VC would look at…

1. 📈 Revenue and growth → VCs will often look at a startup's current revenue and growth rate, as well as its projected revenue and growth potential.
2. 📊 Market size and potential → VCs will typically want to invest in startups operating in markets with large potential, as this can provide significant opportunities for growth and returns on investment.
3. 🏝️ Competitive landscape → VCs will also look at the competitive landscape in the startup's market, including the number and strength of competitors, as well as the startup's competitive advantage and differentiation.
4. 🫂 Management team and leadership → VCs will often consider the quality and experience of a startup's management team and leadership, as this can be critical to the success of the company.
5. 🖥️ Product and technology → VCs will also typically evaluate a startup's product or technology, including its features, functionality, and scalability.
6. 👱 Customer traction and feedback → VCs may also look at a startup's customer base and feedback, including metrics such as customer acquisition cost, retention rate, and customer satisfaction.
7. 💵 Potential for return on investment → Finally, VCs will typically consider the potential for a strong return on investment, including the potential exit strategy and timeline for realizing returns.

🏁 Task

Great job! Now you understand that VCs look for market 📊, product 💲, team 🫂, and metrics 📈

You are now going to find three startups from the market you have chosen.

Try to find early-stage startups (at the seed stage). If possible, try to get your hands on a pitch deck. We will be analysing startups based on these categories in the next module.

Tip: Wondering where to find startups? Try the following sites for some inspiration:

• Crunchbase
• LinkedIn
• AngelList
• Accelerators like Y Combinator, TechStars, 500 Startups, Startmate
• Blogs like TechCrunch, HackerNews
• Startup and product platforms like LetsVenture, Product Hunt, Launching Next, Beta List

You could also check out some public pitch decks.

Framework for Analysing Pitch Decks

When analyzing a pitch deck, use the following framework to evaluate the startup based on the key aspects mentioned in the learning module:

1. Market: Assess the market size, competition, and trends relevant to the startup's industry.
2. Product and Problem: Evaluate the problem being solved, the product offered, and its unique features or differentiation from competitors.
3. Team: Examine the founders' and team members' backgrounds, relevant experience, and their ability to execute the startup's vision.
4. Metrics: Analyze key performance indicators, such as customer traction, revenue, growth rates, and customer feedback.

Feel free to play around with this format and add things you think would be an interesting data point. Different VCs have different ways of analysing companies which is what makes the entire space so interesting. Otherwise every VC would only back the same group of companies!

📚 Further Readings

• Masayoshi Sun (Softbank) Founder-First philosophy
• Ron Conway’s (SV Angels) tips on being a great Angel Investor
• Marc Andreessen’s (a16z) classic article, Software is Eating the World
• Aillen Lee (Cowboy Ventures) on Product Market Fit

Pitch Decks

Now, we’ll be applying principles and questions from the previous module to other startups to build on our deal evaluation skills.

What is a Pitch Deck?

A pitch deck is a presentation that gives ****investors a short summary of a company, its business plan, and its startup vision.

As a Venture Capital Analyst, you will see countless pitch decks and will need to evaluate them based on the principles learned in the previous module. These are:

• What is the problem they are solving? How many people have experience this problem? I.e. What are their customers saying?
• Market - How large is the TAM (Total Addressable Market)?
• Who is in the team? Are they formidable? I.e. Are they the right team to tackle this problem?
• How is their traction so far?
• Do they have a unique approach or insight to the problem they are solving, and/or a competitive advantage?
• What are their metrics? How do they look for their size?
• What further questions would you ask?

Bonus: Biases in Investing

Check out these VCs that focus on underrepresented founders:

• https://twitter.com/MacConwell
• https://twitter.com/lolitataub

🏁 Task

From your analysis of the startups you picked, write concluding notes on your conviction in the startup by answering:

• How would you rank the startups you have sourced?
• Would you present this to your team, or pass? Why/why not?
• What would you like to see for more conviction?

You've just scratched the surface of what it takes to evaluate and invest in high-potential startups!

If you're intrigued by what you've learned and ready to dive deeper into the world of venture capital, our full course awaits. By enrolling, you'll gain comprehensive insights, engage with in-depth case studies, and build the skills to make informed investment decisions.

Don't miss this opportunity to transform your curiosity into expertise!

Enroll in our complete Venture Capital Analyst Fundamentals course today: EntryLevel: Venture Capital Analyst Fundamentals

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