VC Screening Process

VC Screening Process

As a venture capital investment manager, opportunities land on my desk all the time, time is precious, I cannot be “All to Everyone”, and more importantly, if I choose to invest my time and resources into an opportunity with mediocre returns, I will forego other, more lucrative opportunities, something we term as “opportunity cost”.

So how we assess opportunities makes a significant difference to a) time management (and pile of papers on my desk ) b) my quality of work c) reducing opportunity cost and d) maximising my opportunity rewards.

I would like to share my personal view with capital seekers, and hopefully this can give them some useful information.

So what’s the answer?

Follow a quick screening, reductionist principle, do not try to fit a square peg in a round hole, and don’t be everything to everyone. Stick to your mandate, profile and investment philosophy. The ‘reductionist’ principle is nothing more than a flow chart of decision making, pivoting each answer through a “go or no go” decision matrix. A “no go” answer and the business plan goes to the “round” file (no exceptions).

The screening part is the qualitative part of the process, and for me it is based on a number of venture screening methodologies and my own research during my time at the AGSE (Australian Graduate School of Entrepreneurship) and the ensuing years of assessing business plans and ventures.

The questions asked are critical, and the way the answer is derived is just as important as the answer itself.

The screening aims to answer a number of main issues, namely:

Does the venture or opportunity create value to the customer?

If so, how? Does the venture or opportunity solve a significant problem faced by customers? Is the customer willing to pay a premium for that solution?

What are the market characteristics like? Is the market robust, creating high (and durable) margin and moneymaking opportunities? Is the market growth worthwhile (>20%), does the venture exhibit strong, recurring revenue generated from a low asset base? Therefore does the venture have the capacity to return attractive returns for investors?

What does the team look like? Have they done it before? Is there a good fit between the founders, managers and potential investors?
The quick screen seeks to identify details on the market and margins, the range of competitive advantages, the value creation and harvest issues and the overall potential, to determine whether it is worthwhile to embark into a deeper analysis of the opportunity.

Assuming the venture proposal passes my quick screen, it’s time to roll up sleeves and really take a long hard look at the opportunity. It is here where we have the opportunity to ‘tweak’ a venture proposal for added value or identify a ‘fatal flaw’ to avoid sunk costs in a venture.

From here on, the screening is a collaborative effort with the founders, managers, stakeholders to determine the best approach to investors.

The screening at this stage is on the basis of answering well over 300 questions aimed at looking at a number of criterion which include:

  • Opportunity
  • Market and Product
  • Need
  • Economics
  • Model
  • Harvest
  • Value Creation
  • Sustainable Competitive Advantages
  • Competition
  • Intellectual Property
  • Team
  • Alliances
  • Fatal Flaws
  • Assumptions
  • Implementation
  • Decision Making
  • Risk and Mitigation
  • Scenarios (very important!)

At the end of the process, we have the ability of placing the opportunity into one of a number of categories:

  • is it a cash cow?
  • Part of a Fad or fashion?
  • Is it a hobby?
  • Is it buying the ‘entrepreneur’ a job or is it creating real value?
  • Is the venture chasing the real opportunity or is it investing a ‘better mousetrap’?
  • Is it led by innovative entrepreneurs or by technology led technocrats?
  • Is the venture itself an opportunity seeking / led enterprise or is it a technology led one?
  • Quite often a business plan is rewritten based on any new information and insight uncovered.

At worst, a bad opportunity is avoided or a good opportunity is identified or ‘tweaked’ and a well written plan is confirmed to be investor ready.

At best, investors will be convinced to part with their cash and back your venture, which is the ultimate outcome.

CAPITAL.MY