How investors use CxO to evaluate dealflow

As an investor, I have looked into thousands and thousands 
of startups along two decades. In 2022, after automating 
my decision framework and feeding it with tons of data, 
I started supporting investors and corporations looking 
for startups to invest, acquire, or sell. 
This post discusses a bit about it.         

How investors use CxO to evaluate dealflow

If you haven't seen yet, I started a new company in 2022 to increase capital efficiency both for founders and investors. Its first product is called CxO Reports and offers two value propositions:

• For founders, an efficient operation assessment tool to improve journey from product to scale
• For investors and corporations, a productivity tool to accelerate dealflow analysis and manage portfolio companies

How do CxO Reports look like?

You have probably seen those reports used by Human Resources when selecting new hires, such as DISC, MBTI, and others. They are personal profiles that help understand each potential candidate. CxO Reports is very similar, but it diagnoses startups instead of people. Here are examples of co-branded and white-label reports customized for different clients:

In future posts, I'll get into detailed information about the report structure. For now, I'll focus on the radar graphic that scores a startup on its journey from validation to scale.

Understanding the score radar

Above is an example of the score radar for startup StartupName. It will quantify the processes and maturity in each of the eight main areas of a startup operation - People, Technology, Product, Management, Marketing, Sales, Finance, Legal. There are three visual tips on that graphic:

• The purple line shows how StartupName has scored in all eight areas
• The green line shows the target score that the CxO expert system expects StartupName to reach
• Each grey circle, going from 1 to 4 (center to border), indicates the estimated stage of that startup operation: 1 is Validation, 2 is Traction, 3 is Growth, 4 is Scale.

As its purple line grows wider towards 4, a startup is closer to a scalable operation. Hence, capital efficiency is improved as the startup operation reaches the widest line possible with the resources available.

How does it really work?

Investing only 10 minutes and skipping the usual 1-hour introduction call, any founder can fill the information to provide his score and report. This picture shows each step of the way:

I usually get two different reactions from investors on their first glance at the report:

• "What sorcery is this?"
• "This is useless"

Everything changes when they test drive the engine. All I can say is that it's data-driven technology turned into an expert system that dramatically improves dealflow analysis for any investor. Clients with a typical 5-people analyst team testify at least 100 man-hours saved every month after integrating CxO Reports into their routine.

Let's look at some examples of how the score radar - the first part of every CxO Report - can help investors on their daily work.

Earliest stages will pop out

Startup1 and Startup2 are in the validation stage. That usually means no revenue or very few sales, an MVP ready or still underway, not enough people on the team and near-zero marketing. Startup2 even shows sky-high risk, which is a combination of all the red flags a startup can raise.

CxO Reports quickly show that none of those companies should be looking for venture capital since they are far from reaching scale. Just by glancing at those numbers, an angel investor or fund analyst will need no video calls or search linkedin for founder profiles on those two companies. A typical fund with heavy inflow will save dozens of man-hours every month by quickly responding to companies that are in the earliest stages with a polite no-go message.

Low-potential deals can be quickly determined

Startup3 and Startup4 are respectively in the Traction and Growth stages and are good examples of companies that should not be prioritized for analysis. Startup3 shows very high risk (unusual for that stage), so there is a red flag somewhere. Finance is not too bad, but marketing, technology, and product need consistent improvement. Startup4 has medium risk (common for the Growth stage) with high scores for Finance, People and Marketing, but has a big lag on Technology. That is a strong indication that its business model is bringing cash flow, but depends on staff to scale up. To be a scalable business, Startup4 would take time and effort to transition from people to technology.

With CxO Reports, if those two startups entered the dealflow, they should be postponed and investors should be looking at remaining reports for more scalable companies to be evaluated first.

How to quickly prioritize good deals?

The graphics below show interesting patterns for three startups in completely different segments and business models. They may look alike and be in similar stages, but their operations are very different for the trained eye. As an investor, which one would you pick first for a deeper analysis?

To reach scale, Startup5 will need fixes on Technology and Marketing plus small adjustments on Product and Management - remaining areas can be gradually improved. A quick read of their report shows that technology needs refactoring to deliver properly. If Startup5 works hard to improve operation, it would take from 2 to 3 quarters to fix all remaining gaps for a scalable business. Not bad for an established cash flow machine.

Chances are Startup6 has strong technical founders, since Technology and Product are very well managed but Marketing and Sales are lacking. The People axis scores less than 2.5, which suggests a small headcount and no formal people management. Startup6 is covering the gap from traction to growth and has a longer journey towards scale - probably 5 to 7 quarters of constant improvement in sales, plus hiring a skilled COO to coordinate the whole operation.

Startup7 has a strong potential for growth, probably due to a great sales co-founder. Both Marketing and Scales score 4, which brings cash flow enough to score 4 in Finance as well. There is a clear lag on Technology and Product, which suggests a need for improvement for scale. To cover a product gap that size, the effort would take at least 3 quarters.

With that in mind, a post-seed investor should prioritize analysis for Startup5 and Startup7 to better understand their market, business model, and financial data. The best deal for a seed fund would be to dig deeper into Startup6, because the product is well managed and sales could be improved. In the end, it all depends on each investor's investment thesis, and obviously on the deep understanding of each operation beyond the report.

By signing up to a co-branded or white label version of CxO Reports, any angel investor, angel group, accelerator, fund, or corporation can have quick dealflow information at any time. Reports can also be automatically ordered and displayed in the investor's screening tool (such as Trello, Airtable, or any other).

If you're an investor, M&A operation, or corporate ventures office, get in touch to test drive the CxO Reports engine.

It will save you money, time, reduce risk, and improve decision making.