Investing in a startup ‘case’ vs a startup’s DNA
When I hear folks discussing a potential startup investment I’ll often hear something like “it’s a really attractive case” or after the team has made certain changes to the pitch, “the case has improved a lot.”
Although in most cases it is meant well, I don’t like that way of thinking because it feels like we are at business school and are making decisions based on how slides and spreadsheets are changing.
What it completely ignores is what I call the company’s or team’s “DNA” – i.e. its intrinsic capabilities that are completely detached from any kind of plan. Let me explain using an example:
A team approaches investor X and the investor thinks that the product roadmap is too slow and revenue ramp is too late. The team works on the pitch and comes back with a faster product roll-out and a more aggressive revenue plan. The investor says “the case has improved a lot” and is now more likely to invest.
However, nothing has changed at the company – same team, same product, same market, etc. In fact, nothing has improved at all, except a few slides and numbers on a spread sheet. That is why I really dislike decisions that are based on how ‘cases’ are moving around.
DNA investing works differently and it is my preferred method: Say if I have questions around a company’s product roadmap or monetization strategy I would much rather focus on observing its ‘DNA’ in those areas, e.g.:
- While we were engaging with the team have they iterated quickly on their product?
- What is the observable product quality to me; to their customers?
- How have they reflected user / customer feedback in to the product in the past?
- How is the product team assembled, what are the backgrounds of the product folks at the company?
- Does the team have a clear idea on how / where to monetize and how / where not to? Is there a philosophy behind it?
- Have they been agile in testing pricing structures in the past? Are they structured in their thinking vs benchmarks, competitors, etc?
- Does the team have a relevant background in monetizing this kind of product? If not, do they know who they want to hire?
If I have a good feeling on the above, quite frankly, I don’t really care about the plan so much at all. That will be easy to figure out together. However it will be very hard if you don’t have the DNA to do it, no matter what it says in your pitch or spreadsheet.
This is oversimplified but you get the picture. A company’s DNA is way more important than it’s business ‘case’. Unless of course you are actually at business school.