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Question: How do you determine/evaluate whether or not to follow your investments? (i.e. if you were in the seed round would you participate in Series A etc.)
Fundamentally, our mindset and approach to investing is based on having a long term view of success—therefore, when we make a commitment to investing in a specific round, we do so with the understanding that we are entering a long term partnership with a founder and will welcome the opportunity to continue to support this founder in subsequent rounds. When it comes time to make the investment decision, we typically look to answer a few key questions.
First, is the initial investment thesis still valid? As part of every diligence process, we develop a hypothesis about what the company’s path to success looks like based on factors like the addressable market, competitive advantages, ability to innovate, etc. However, we go into every deal with the realistic understanding that building a company will have problems, take longer, and cost more money, just as a matter of course. With a follow-on investment, therefore, we’d take a second look at that hypothesis, trying to see how the investment thesis is panning out and to determine if there are any fundamental issues at play, such as a smaller than anticipated addressable market, poor product-market fit, or other players gaining more traction. Even with these issues, we could conclude that the company is still an attractive investment, but during the diligence process, we would want to have discussions internally and with management about how they are thinking about and responding to these issues.
Second, how has the company balanced executing against plan while remaining flexible enough to pivot and adjust? Business plans and product roadmaps often set strategy, development, and growth well in advance, and despite the best market research and planning, companies and entrepreneurs may discover in the course of selling the product and getting feedback from customers that the roadmap may prioritize features incorrectly, or may even be missing key capabilities altogether, especially with early-stage startups. As management teams gain insight into both best practices and unforeseen hurdles, whether that is in the product roadmap, sales strategies, pace of hiring, etc. and it’s important that they be able to modify execution plans and manage around these issues to keep ahead of the customer and market needs.
Third, how well have the management team and investors worked together in guiding and developing the company? Venture investments are about collaboration and partnership as much as they are about capital and equity, and the success of the company depends in no small part on a good rapport between investors and management. The former needs to trust the latter to keep them apprised of the company’s development and progress and so that the latter feels comfortable seeking advice and perspective on how to solve or address problems with the business.
Each week the team at Pritzker Group Venture Capital answers your questions about startups, raising capital, technology, and entrepreneurship. Submit your own question and see more answers here.
