Market Size

My Investment Checklist

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I like checklists. You can do a lot with them. Help you stay on task. Focus your analysis. Remind yourself about things you might otherwise forget.

Checklists are great when looking at investments. Companies are complicated thing. Checklists can help you focus in on what is really important. I wanted to share my checklist of the things I look for when evaluating a startup.

Is this a hair on fire problem?

The first and the most important question. This one is not optional. If your startup is not solving a real problem for real people, you don’t stand much of a chance. It can’t be a nice to have. People don’t change their habits and make buying decisions for “nice to haves”. You either need to solve a top 2-3 problem your customer experiences every day or you need to create a product that is so incredibly compelling that using it literally creates tangible joy for your user. 95% of successful startups are in the game of solving problems. If your startup is in the 5% that creates unbridled joy in your customers, you can stop reading this article now, you’re probably fine.

The number one reason why startups die is because there is no market demand for their product. They aren’t solving a hair on fire problem. If the answer to this question is no: do not pass go, do not collect $200 dollars. I don’t care if your total addressable market is a million billion trillion dollars (which apparently every market is based upon pitch decks), if you aren’t solving a hair on fire problem for people, you are going to need to spend more time cooking on your product.

Does the founder fit the market?

Ahh the much-debated “founder-market fit” question. There is significant debate in the industry about just how important it is for a founder to have first-hand experience with the problem they are solving. I have written about my feelings in depth here. Suffice to say, I am a big believer. Entrepreneurship is hard. Like really, really, really hard. Like trying to write a blog about investment criteria while your wife is watching Season 5 of the Gilmore Girls (it should be easy to to ignore, but it is just so catchy. And I like this new Logan fellow, he is a much better fit for Rory than Dean or Jess.). But in all seriousness, entrepreneurship is brutally difficult and I want to be sure that an entrepreneur will stick with it when the night is cold and the chips are on the table. As much as I like to take founder-market fit into account, it is not a must for me. Experienced entrepreneurs can build excellent businesses. And people can fall in love with their customers’ problems without having experienced it themselves. BUT having a personal connection really helps. Founder-market fit is a nice-to-have, but not a must-have. It is something I always look for though.

Who is experiencing the problem?

Notice this question is not “how big is the market?”. Every single investment pitch I listen to talks about how epicly big their market is. Caring about big markets isn’t that helpful when every entrepreneur claims that every market is enormous. Furthermore, I think investors get too hung up on market size anyways. In venture capital, you are investing in the companies of tomorrow. Markets change a lot in 5-8 years, which is how long it takes a company to mature. Looking at the way that markets are today is less than helpful. What is much more important is to understand who the users/customers are for the product. If you truly understand who is going to use the product, you have a much deeper insight into how big this company can be. You can form an opinion about where the company is today and where it will be tomorrow. Understand the who, and you can develop a thesis on the where.

Is there an axehead here?

This is the most recent addition to the list. I unapologetically got this concept from Fred Wilson at USV (though I think it has its true epistemological roots in Thielism). This question is about a startup’s market entry strategy. An axehead strategy is when a startup enters a niche market (sharp edge of the axe), gains momentum, and then is able to carry that momentum into adjacent larger markets (the wedge of the ace). This along with our prior question on who the customers are is my substitute for “how big is the market?”. I am much more interested in a truly compelling product with a smart market-entry strategy, than a company playing in a market 2.5x the size of the world’s GDP (you laugh, but I have seen some wild assumptions in pitch decks before). Truly transformational startups often seem to conjure a brand new market out of thin air. This is how they do it.

Can this team execute?

Team, team, team, team. When you are an early stage investor, team is everything. Later stage investors may focus on other things, but team is the alpha and the omega of early stage investing. A strong team will be able to drive a mediocre idea to a decent outcome. A weak team will snatch defeat from the jaws of victory even with the best idea ever. At the early stage of a company the team is absolutely key. And this makes sense. Without momentum all you’ve got is the blood, sweat, and tears of your team. And with small teams, each person is responsible for a huge portion of the value of the company. The trick is to really understand if this is a team that can execute on their idea. A great way to do this is to spend time on site with the company and really get to know the ins and outs of the team. The best way to do this is to help fill gaps on the team with operators out of your own network that you know can get the job done. Either way answering the question of whether or not this is the right team is absolutely vital, especially at a company’s earliest stages.

It’s important to know that these items are always evolving. This is what I look for in investments today. I think it is good to memorialize that. If your company checks all these boxes, reach out.

I want to hear from you.