Despite the fanfare in much of the press regarding soaring valuations and the potential existence of a tech bubble, SoftTech VC Founder and Managing Director Jeff Clavier says that startup investing can be broken down into three very simple metrics: the 3 A’s. In the latest episode I am joined by Andy McLoughlin – Co-Founder at Huddle, Partner at SoftTech VC and prolific angel investor – as we delve into the three simple investment principles that have been the driving force behind SoftTech’s success.
When asked which must take priority, people or product, Andy clearly states, ‘neither’ – the two are mutually dependent. Therefore, this list is not prioritised: all three points are pivotal to a successful investment.
Entrepreneurs > Product > Market
1. Smart-ass team
As Jeff Clavier has stated, at SoftTech they look for people who can ‘walk through walls’. But what does that really mean? How can we be sure we have found a disruptive entrepreneur who can change industries? In our interview, Andy suggests that when you, as an investor, are assessing the ability of an entrepreneur, you must look for three things: vision, tenacity, and empathy. You must be confidant that they have the passion and inherent domain knowledge to obtain an unfair advantage in their sector, one that will allow them to execute and realise the potential of the company in a different way to the rest of the market. ‘But is this line of founder assessment really likely to pay off?’, I hear you ask. Well, it’s exactly the approach that led to SoftTech’s investments in the likes of Fitbit’s James Park, Eventbrite’s Kevin Hartz, and Postmates’ Bastian Lehmann – I’ll let you decide whether those investments paid off.
2. Kick-ass product
As Andy says in our interview, ‘a great product is basically table stakes these days’. The design and feel of the product is the user’s first impression not only of the product but of the company as a whole, and so must be perfect. When using it, you must ask yourself, ‘does the product look great?’, ‘is it easy to use?’, ‘what is the onboarding process if it requires a sign up?’, and so on. It is imperative to place yourself in the position of the consumer. Before committing to an investment, Andy will always ask himself, ‘would I want to use this personally?’, ‘would I buy it for someone else?’, ‘does it make my life easier?’. If you’re considering a non-consumer product, ask yourself if it will make your team more effective, or whether it will allow you to work in a smoother, more efficient way. Put simply, never lose sight of the consumers – after all, they are the ones who control the fate of your investment.
3. Big-ass market
‘Sorry guys, it’s the size of the wave, not the motion of the ocean.’
– Mark Suster, Partner, Upfront Ventures
It’s often said that VCs demand a billion-dollar market, and Andy says that angel investors should expect no less - particularly as they tend to invest at earlier stages where the product may not be fully developed and the degree of risk is likely higher.
Why this billion-dollar figure is so important lies with the understanding that the acquisition value of a company is often calculated using a multiple of annual revenues or expected annual revenues. When a VC invests they need to be certain that the market is large enough for the venture they've invested in to achieve healthy revenues, and a healthy return.
The multiple used to calculate the company’s acquisition value will range depending on a number of factors including sector and competition – both in industry and in number of potential acquirers vying for the business, total market size, and how hot the sector is perceived to be. This multiple is often in the low single digits but, in a hot sector, and where a lot of companies are looking to make an acquisition, can rise above ten and into the teens.