Over the last couple of weeks and months we spent some time putting our investment thesis on paper. The purpose of this exercise was to challenge and discuss our implicit assumptions and to get everyone on our team aligned on what kind of investments we seek.
One of the things that being very clear about our investment focus helps with is getting to “no” faster. If that sounds pessimistic, remember that we see thousands of potential investments every year but can only do 10-15 of them. Just like it’s crucial for sales teams to have clear qualification and disqualification criteria, it’s important for us to focus our time on “higher probability deals”. That means we’ll have to be able to quickly pass on a large number of deals that are likely not a good fit for us. Our “filter” is of course not perfect, so we’ll inevitably pass on lots of great companies, some of which will end up in our growing anti-portfolio – but there aren’t enough hours in the day to take a close look at each company that we see.
A fast decision process is also important for founders. As we’ve learned from this survey, being left in the dark is the single most important reason why fundraising often sucks for founders. We will obviously never be able to make decisions based on a simple algorithm, if only for the fact that the founding team remains the most important of all criteria. But anything that helps us streamline our decision making process is welcome.
Once the document is in a publishable form we will post it. Bear with us for a little while as we’re polishing the document a bit to make it more self-explanatory and to remove the worst typos. 😉 In the meantime, here’s a sneak preview.
We will continue to focus on two business models: SaaS and marketplaces
- We use a broad definition of SaaS. Usually the first “S” stands for “software”, but sometimes it stands for “something”, e.g. a combination of software and hardware or software and data.
- We’re interested in horizontal and vertical SaaS. What counts is that the startup is aiming to solve a big enough problem for a large enough number of potential customers in order to build a big business. As a rule of thumb, we’re looking for markets that consist of at least 3,000 whales ($1M ACV), 30,000 elephants ($100k ACV), 300,000 deer ($10k ACV) or 3M rabbits ($1k ACV). 1
- We’re equally interested in companies targeting SMBs (AKA rabbit and deer hunters) and companies targeting enterprises (AKA elephant and whale hunters). What’s important is the right founder/market fit. For companies targeting very small businesses (AKA mice and rabbit hunters) we want to see the potential for viral distribution.
- We’re looking for companies that we think can build a 10x better product and/or drive a paradigm shift in the industry. 2
- We want to invest in companies that can eventually build moat e.g. by becoming a system of record or a “system of intelligence”; by building a large data set that in combination with machine learning translates into a superior product; by building a platform; or by becoming a SaaS-enabled marketplace.
- With very few exceptions in areas like accounting, we’re looking for companies that have the potential to win the US market.
- We’re looking for SaaS companies that have the potential to get to $100M in ARR within 7-8 years and to $250-300M ARR within another 2-3 years.
- Like in the case of SaaS, we use a broad definition for marketplaces. For us, a marketplace is a digital platform that brings two or more parties together and enables them to “transact”. The object of the transaction can be a physical product, a digital product, a service, or in some cases a piece of information or knowledge.
- We look for startups that leverage marketplace dynamics to create unique user experiences in fragmented markets, with the potential to develop a moat through network effects.
- We believe that marketplace platforms will continue to emerge in the most unexpected of places and in the most unexpected of forms. They will continue to transform entire industries.
- We are open to all of C2C, B2C, B2BC and other types of marketplaces. We are particularly excited about B2B marketplaces and “SaaS enabled marketplaces”.
- We are trying to identify platforms able to become international leaders. Thus, we will typically look for early proof of ability to operate in more than one country or globally.
- We are looking for early signs of liquidity. 3
- We look for founding teams with strong commercial sense.
- We think that blockchain technologies have the the potential to disrupt many marketplace models as we know them today; we will be exploring them in depth.
- We look for marketplaces that can become truly significant. In monetary terms, this means the potential to ultimately generate hundreds of millions of dollars in annual net revenues and billions in GMV.
Thanks for contributing this section, Pawel. Expect a follow-up post with more details from Pawel (who’s leading most of our marketplace investments) soon.
We will continue to invest in new areas and technologies that we like to dub “Frontier Tech”
- While we’re focused on two business models – SaaS and marketplaces – we’ll continue to keep our eyes wide open with respect to new technologies.
- We’re extremely interested in new opportunities in areas such as AI/ML, blockchain and cryptocurrencies, IoT and hardware-as-a-service, drones, or AR/VR. We have already made investments in most of these areas and will continue to do so.
- In many of these cases there are complex tech problems that must be solved. We’re happy take a certain level of technology risk, but at the same time we’re looking for founders who find ways to bring a product to the market quickly and cheaply.
- While a superior technology will usually be key to entering the market and have some early wins, most technologies will eventually be commoditized. Therefore we’re looking for additional sources of long-term defensibility such as high switching costs and large data sets (see the section on SaaS above) or network effects (see the section on marketplaces above).
Thanks to Mr. Frontier Tech Rodrigo for your help with this section, and looking forward to your follow-up post as well.
We will continue to focus on early-stage investments
- We’ll continue to focus on seed investments, investing anything from a few hundred thousand dollars up to around $2M in “seed” and “late seed” rounds, typically in companies that have strong indications of Product/Market Fit and promising early traction.
- We will continue to make what we call „founder bets“: Idea-stage investments into proven entrepreneurs from our close network. In these cases most of our „rules“ don’t apply. When people like Doreen Huber, Fabian Siegel, Iñigo Juantegui, Pan Katsukis, Sebastian Diemer or Stefan Smalla start something new, we want to be part of it. 4
We will continue to invest internationally
- Europe is our home market – we’ve made investments in most European countries and we’ll continue to invest all over Europe.
- Especially in SaaS we will continue to invest outside of Europe as well – e.g. in the US, Canada, Australia, New Zealand and other countries.
- In SaaS, our assumption is that you can start almost anywhere but you have to win globally (which requires winning the US). In marketplaces we want to find companies that can win several large markets.
We continue to aspire to be a “Good VC”
- We don’t pretend to be the right investor for every startup. But our aspiration is that if we do invest in a company, we’re the absolute best partner the founders can dream of and that we’ll play a significant role in helping the company get to the next stages.
- We’re optimizing for the long run in everything we do. You “always meet twice in life”, as the German saying goes.
1 Check out this post if you have no idea what I’m talking about. Then, get your poster.
2 See Sarah Tavel’s post about “10x better and cheaper products” for a similar concept from the consumer Internet world.
3 Defining liquidity is tricky – a topic for another post!
4 True story – these are all guys who we backed or worked with closely before and who subsequently founded Lemoncat, Marley Spoon, OnTruck, Remerge, Finiata and Westwing, respectively.