The Covid pandemic has changed consumer behaviour and accelerated the adoption of digital in a way not seen since the dawn on the mobile internet.
It is, by all accounts, time once again for entrepreneurs to build the next generation of unicorns.
Some experts are describing this new era, brought about by the acceleration in digital transformation, as the Big Thaw; a nod to the fact that we have seen so few major start-up breakthroughs in the last few years as innovation all but disappeared as companies focused on scaling.
It has been, by all accounts, a digital ‘ice age’.
But we stand today at the precipice of change as all of our psychological and emotional beliefs are challenged, producing an acceleration in uptake of new tech across swathes of industry.
Video, gaming, home delivery, personal health protection and awareness have all climbed the priority list as we hunt for ways to minimize risk in our lives – and in doing so discover the benefits of doing things in different ways.
It is change that has unleashed a tsunami of innovation and opened up a new golden age of digital.
Investing in the opportunity
While many believed that a global lockdown would reduce the number of startups seeking support for new ventures, at Haatch we’ve seen quite the opposite, as those with a vision beyond the initial shutdown look at how they can find traction and opportunity from the shift.
Growth stories such as those seen about platforms such as Zoom, ClubHouse and Rave in the video space (most recent analysis suggests the former now supports a daily user base in excess of 300 million) and others in everything from remote working support to food delivery, is inspiring confidence that new ideas will achieve scale.
And so, with this new-found wave of innovation, it then follows that it is also a ‘golden age’ for early stage investors, keen to back the next digital unicorns that will power the job creation and economic growth of the post-Covid era.
What to look out for…
Picking a winner in the chaos is however, difficult. Structural change creates an incredibly fertile landscape from which to make investments, but it is also means that change is ever-present as new and emerging market opportunities are competing with rapidly scaling and expanding existing ones to make it difficult to pick the right kind of opportunity.
It’s a challenge we face daily at Haatch and having seen in excess of 500 start up pitches over the last 12 months we have been able to use that experience to refine our own opportunity discovery process.
How do we do that? The simple answer is we’ve added, or tweaked, a number of key questions that we like to ask of the opportunity, or the founding team, in order to best assess the upside and minimize the downside risk.
Clearly there are a lot more questions asked but the ones captured below have been added to support our usual Due Diligence process since early March…
- Does the founding team have specific expertise in the market they are building within if the opportunity is within a new niche?
While experience is always good to see if we are considering an investment in a cutting-edge niche, and one which has seen uptake accelerate, it becomes critical. We invest in deeply embedded experts, often that have lived in the market previously as early adopters.
- Is the business able to accelerate as a result of the changes we are now seeing post Covid?
As we have written previously the pandemic has accelerated the pace of change across a number of key markets and we are proactively looking for early stage businesses that could take advantage of that. Healthcare, retail, supply chain, remote working, gaming, EdTech, contactless tech and so on are suddenly even more attractive than they were…
- Are they raising enough?
With access to funding and uncertainty around market recovery now a real threat it is imperative to us that the round they are looking to raise gives them at least 12 months of cold, hard runway, without any further revenue growth.
- How big a threat is Facebook or Amazon?
While, historically,we may have looked at a wider set of competitors, in the majority of cases it is now either of these two FAANGs that threaten most start-ups and can stifle their growth ambitions. It is now imperative to consider their strategy against that of the potential investment business to weight up the risk versus reward balance.
- Do they have ‘the ability to pivot’?
Whilst we don’t expect them to need to the current climate and changing consumer attitudes and behaviour make it more important to be able to, should the opportunity arise within the next few months.
- Can we raise the next round if they need it?
An obvious one to ask but often forgottenin the excitement of finding a great company opportunity.We try and picture where the business – and the world – will be a year from now andthink about the proposition of investing in the business at a much higher valuation. Is it still an exciting growth opportunity?
- Can the founders run a lean operation?
Whilst in times of plenty it can be good to back founders with huge ambitions and with the ability to go for scale, fast at present we also need to see that they are capable of running a tight ship and are able to do so for a number of months if necessary. It’s what we call the ‘survive at all costs instinct.’ We also expect them to proactively present us with that version of their financial plan to prove they have thought about it.
The above is far from an exhaustive list but it should help steer your thinking as you begin, once again, to review your investment decisions. Our view is that there are few better places right now to invest your money than the start up space!
Add your thoughts on what you are looking for as part of your assessment criteria below and become part of the conversation…