You invest at all of the following VIRAL levels:
You begin investing at VIRAL Level:
4: You back teams going after big markets
You typically invest in an angel round (up to $100K in investment in up to $500K of a round). You want to see that the team has as massive market ($1B+ if you’re investing equity) and has initial traction (100 customers if B2C, 5 customers if B2B).
Where you can add the most value to entrepreneurs at this stage:
Help entrepreneurs understand the caliber of team you’d expect to invest in, and have them think through who they would hire if they raised money from you. They should be spending most of your investment dollars on their team, so spend far more time helping them think through how to hire–and who to hire–than any other topic.
- Unit economics: Tell entrepreneurs that a large financial model doesn’t matter; a deep understanding of their economics at the unit level does (sales cycles, renewal rates, marketing/customer acquisition costs.)
- Market logic:Tell entrepreneurs that projected market size (“If we can get 1% of a $300 billion market, we’ll be a $3B business) doesn’t matter. Market segmentation matters far more. What subsets/segments can the entrepreneur be particularly successful in?
Common questions you should consider asking in due diligence:
What’s your human capital plan?
Who are you going to hire and for what? (The founders are likely very talented, and one of the biggest risks at this stage is that the team can’t maintain the same quality as the founders. The founders who have the best idea of who they want to hire–even specific names!) are the most likely to succeed.)
- Tell me about your unit economics.What is the lifetime value of each customer? What are the sales cycles? What are your renewal rate? What does it cost you to acquire a customer? (The founders who know who are the most valuable customers, how long it takes to sell, and how likely they are to renew are most likely to succeed.)
- Tell me about your feedback cycle.How are you getting feedback from customers? How are you measuring customer engagement, success, referral rate?
- What are your key metrics?How are you measuring if you’re successful? What is the positive impact you’re trying to have on each customer (cost savings, speed, social/environmental impact) and how do you measure it? (The teams who have a clear “before and after” value proposition are most likely to be successful.)