What are the best data-driven strategies for deciding whether to invest in an existing company?

Things to be considered while evaluating an early stage investment - 1) TAM (Total Addressable Market), SAM (Serviceable Available Market), SOM (Serviceable Obtainable Market) 2) Founders - their experience and track record 3) Initial Traction including customer acquisition and growth trends

To make an informed investment decision in an existing company, start by integrating customer insights with a competitive analysis. Understanding the competitive landscape is crucial; it involves analyzing competitors to gauge who is in the game and their level of proficiency. Equally important are customer insights, which include feedback and satisfaction levels. These insights are invaluable as they reveal whether the company truly resonates with its audience. Together, these data points provide a clearer picture to guide your investment decision.

To deeply understand the market within which the startup operates, we can perform a cross-analysis of several points, such as: - Market Size (TAM, SAM, and SOM); - Competitors/Technology; - Startup Health (Financial and Operational). Certainly, there may be other metrics; this is highly variable and involves the entire organization and the maturity of its innovation initiatives. However, it is never too much to opt for a more technical and comprehensive analysis supported by data to underpin a decision that can impact both the corporation and the startup.

Traction Tracker: Has the company gained traction? Look for metrics like revenue growth, user base expansion, retention rates, and customer engagement. Compare them to goals, industry benchmarks, and best practices. A healthy, growing customer base is a promising sign. Team Telescope: The team is the engine driving the company. Assess their skills, experience, passion, and alignment with the business vision. Background checks, personal meetings, and observing communication dynamics reveal the team's true potential. Unit Economics Microscope: Scrutinize the unit economics. Metrics like customer acquisition cost, lifetime value, and break-even point tell you how efficiently the business model generates profit and scales.

In my experience I have found below data- driven strategies to be useful: 1-Industry Growth. 2-Market share in the industry. 3-Founder's background & Leadership Team. 4-Unit Economics of the company like CAC, TAM. 6-Financial Analysis. 7-Legal Compliances. 8-Cutomer retention.

Traction is a slightly abused term. People will often frame the question as: "What does your traction look like?" or "How much traction have you generated?". Good questions. But there's a better way to frame these using the 3D method. This method lets you literally put traction in a 3D space with the 3 axes being: (i) time, (ii) money (proxy for effort) and (iii) traction (proxy for outcome). When asking a traction related question, always frame it in those 3 dimensions for max insight. Here's an example. "I see that your business is just over a year old. How much traction have you generated in terms of customer growth in the trailing 6 months and how has your spend changed during this period?" Repeat this and.. Boom. You have a spread.

Focus on revenues and revenue growth rates. Then use KPIs that depend on the business model. They depend if a company is B2B or B2C and its revenue model, such as e-commerce, platforms, SaaS, and transactional. Some examples are retention, gross margins, Letters of Intent, pilot programs signed, Net Promoter Scores etc. What is important is that the data shows that the company's constraint is financial. They struggle to meet a clear demand due to capital expenditure (e.g. installed capacity) and working capital limitations (e.g. low inventory, sales personnel etc). The more a company can show that there is demand for their solution but they lack the capacity to meet this demand. The easier the decision-making process becomes.

(Disclaimer: I built a VC portfolio management tool - VESTBERRY) From my experience, evaluating a company's traction through data is key. Metrics like revenue growth, user acquisition, and engagement tell us if a company is resonating with its target audience. To compare these figures against industry standards and the company's forecasts to gauge its market fit and growth potential. Successful investing is about using these insights to spot companies on the brink of significant growth. In VC, around 60% of deployable capital is invested through follow-ons. It’s the art of backing the right horse, informed by solid data analysis.

Assessing a company's traction is key in deciding on investments. Look at sales growth, customer retention rates, and market penetration. It's about understanding the company's momentum—like gauging the speed and direction of a moving train. Does it have the velocity and track to reach its destination? This assessment gives a clear picture of the company's market position and growth potential, vital for making informed investment decisions.

The team is the engine of any company. This is especially the case for startups. Obviously the team should have relevant skills, experiences, and mission. As a startup grows, it has different objectives. At very early stages, a startup may be focusing on product development, so the team should have the capabilities to develop and iterate on the core tech/product plus managing some pilot projects and to achieve product-market-fit. As a startup enters the growth stage, the product-market-fit is validated and the company is in high growth mode (revenue, profit, active users, etc). Now the team needs people with experience to guide the company towards that direction. Are you able to help to strengthen the team if you become an investor?

In startups, where processes are not established, success depends on the team's ability to turn plans into reality. Determine if they have the necessary core skills to tackle the problem they're facing. Especially technical and sales. Professional experience in the segment is a good bonus. In VC, we refer to this as "founder-problem fit". At the early stage, there will be some skills missing (e.g. customer support, marketing, finance etc). Filling these gaps should be part of their plan after initial traction. Key qualities in the best entrepreneurs are resilience and a firm belief in their success. Assessing resilience during a call or even face to face is almost impossible. The best indicator is their past actions. Look for that.

Evaluating the team of a company is a crucial data-driven strategy for investment decisions. Investigate the leadership's track record, industry expertise, and past successes. Examine their adaptability and resilience, key indicators of their ability to navigate challenges. This is like scrutinizing the crew of a ship; their skills, experience, and synergy determine the voyage's success. A strong, capable team often correlates with a company’s potential to innovate, execute, and grow, making it a critical factor in investment considerations.

The analysis must consider established aspects such as revenue streams, cost and expense structure, especially the structure of fixed and variable costs, etc. However, I understand that perhaps the most important analysis is related to the growth capacity of the unit: what is the addressable market and the trends? Does the unit have the capacity to expand, and with what capital requirement? If the market is declining, can the unit reinvent itself? No sound cost and expense management survives declining revenues.

I would advise analyzing the unit economics of the company for investment consideration. This involves assessing the revenue and costs associated with a single unit of the company's product or service. It's a critical measure of efficiency and scalability. Good unit economics indicate that the company can profitably expand, while poor unit economics suggest challenges in sustainability as the business grows. This analysis is akin to evaluating the health of a tree by examining a single leaf; it's a microcosm of the company's broader financial viability.

The best way to understand whether to invest in an existing company is to evaluate 2 buckets of information: a) does the primary hypothesis on the market and team continue to hold - this shows that not only the company is right fit in your portfolio but you are also right for the company by being right in your understanding AND b) will the 'new capital' also generate the minimum venture returns your Fund seeks - many a times, Investors think about the blended returns only and not the returns from the new capital.

Try to figure out whether the company truly understands the industries' key value drivers and how they have incorporated this understanding into their financials. Subsequently compare the outcomes of these key value drivers to (listed) peers to figure out how much room the company has to improve. Look at analyst reports to get a quick feeling for key value drivers yourself.

When considering investment in an existing company, a data-driven approach is crucial. Think of it like being a detective – you're gathering clues to solve a puzzle. To put the pieces in place you want to look into the company's financials like revenue growth, profit margins, and cash flow while understanding the market size and growth. It's key to assessing the playground where the company competes. Are there enough opportunities?

Data-driven investment strategies involve using statistical analysis and insights derived from various data sources to make investment decisions and test hypotheses. Factor analysis which focuses on specific factors or characteristics which is believed to drive returns is best to assess assumptions made on these factors.

Approaching assumptions as hypotheses awaiting validation offers a structured framework for investment decisions. Rather than following the company's beliefs, consider them as propositions to be rigorously tested. This involves confirming their validity and understanding their impact on the business model. Employing techniques like A/B testing or customer interviews can provide tangible insights. Moreover, it's vital to assess the scalability of these assumptions: do they hold as the company grows or enters new markets to ensure that its strategic direction is resilient and adaptable to market dynamics? This meticulous validation process is about driving a robust, data-driven foundation for future growth and investment.

The most important assumption to validate is the problem that you allegedly are addressing. There is a market for anything but it can only exist if you are solving a problem (known or unknown). Find hard facts to prove this.

While market, team, traction, and financials are definitely good metrics to evaluate a startup, as a deep tech investor, I would also evaluate the core technology e.g. whether there is a proprietary technology and how defensible it is.

Pour bien évaluer la capacité d'execution d'une startup, ie. leur capacité à prendre le marché et à optimiser le product/market fit régulièrement, je privilégie soit des serial-entrepreneurs à la tête de l'entreprise, soit des primo-entrepreneurs mais très bien entourés d'advisors expérimentés.

Analyser les pratiques durables de l'entreprise, ses initiatives en matière de responsabilité sociale d'entreprise (RSE), est essentiel pour évaluer les opportunités d'investissement responsables et durables; cela veut étudier les rapports de durabilité, des certifications écologiques, ou les engagements envers les objectifs de développement durable par exemple

Of course, we also need to look at strategic investments. Is the existing company complementary or supplementary to our current business, or any of our existing portfolio companies. Can we find synergies, or ways to maximize each other's value. Maybe we are in a situation that can help the company gain a foothold in the target market.

Market: whether there exists micro and macro market conditions that could absorb a new product/service. Approach to market: how the founding tram engages community and create a flywheel that furthers product adoption. Founder grit/resilience: any social prrpf.of founders resilience and ability to persistent against odds is vital to long-term success.