Lately we’ve been getting lots of questions around how we choose companies, so we figured we would discuss our methodology:
What do we look for?
1. The Founding Team:
Marc Andreessen asks “can you not just see the future, but summon it?”
That's an elegant way of saying, it’s not about the idea, it’s about the founding team’s ability to turn a vision into reality. It’s the team that brings that idea to fruition. Moreover, a great team will identify problems in their original idea, and make the necessary changes to make it successful.
Next, we look at timing. There have been plenty of startups with fantastic ideas that were too far ahead of their time, and many more that are too late. To strike that balance we look for companies that fit or complement our 5 year outlook.
3. Idea and Business Model:
Third is idea and business model. We look for models that are two orders of magnitude better than the status quo. As a startup, there are many hurdles, one of them is the cost of changing. From businesses to consumers, people do not like to change things that are working “well enough” for them, so a startup needs to be undeniable, and we find that those ideas are order of magnitudes better than the status quo.
Traction is fourth. Traction is strong data that indicates a market acceptance of your business. That can look like strong new user data, strong partnerships, low churn rates, and/or strong engagement. Traction tells us that the market is ready and once the product or service is ready for release, it will be adopted by the market’s first adopters.
Fifth, we look at the market; size, competition, and fit. Looking at market is a difficult one. It’s an area that is always changing, and if a business is good, it can significantly change the dynamics of a market. That being said, the market for underwater basket weaving won’t be as large as energy in the near future, and competing against Google will continue to be difficult. It’s from this perspective that we evaluate the market.
Finally, and most crucially, we do not use the above list as a checklist, it’s more of a guideline.
We are looking for companies that excel in one of the first four categories, not a company that is just adequate across the board. In this way, we find some truly extraordinary opportunities.