Questions

How do VC analysts evaluate the business model, numbers and financial plan of a venture? What tools, frameworks and methods do you use?

Frameworks for new ideas, new innovations, and entrepreneurial models don't truly provide a good measurement of the connections between a company and success for an investor. I haven't seen VC's use SWOT analysis, Porter's 5 forces or Blue Ocean Strategy mapping in any real significant way.

The venture market is looking to reduce risk along a couple of vectors:

1.) Technical - Can the product be built in the way the founders say it can be built? This is where proof of concept and prototyping really matter if the product is anything but a standard development cycle (ie. standard App, SaaS, traditional Agile software cycle).

2.) Marketing - Can you reach customers at scale in a cost-effective manner? This implies that you understand your market well enough to identify high quality paying customers and know how to reach those customers through cost-effective channels. I have seen some VC's review the customer adoption lifecycle and develop market percentages (ie. from the book Crossing the Chasm, https://ondigitalmarketing.com/learn/odm/foundations/5-customer-segments-technology-adoption/). But I haven't seen this from a large majority of firms.

3.) Market - This is the biggest risk VC's take and the one you'll have the most difficulty and the one that is the most important to overcome. Will the dogs eat the dog food? Once you build it will they come? These are the kinds of questions VC will ask and no one has a solid model on how to answer. Other than customer velocity. If you can show increase customer adoption velocity on a MoM basis, that in itself is the real-world data and can be extrapolated.

There are other components to a company: management, financial, operational, that VC's will dig deep into. And those have their own metrics and heuristics.

Please set up a call to discuss further if you have specific questions.


Answered 5 years ago

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