How we select startups and why: The investment thesis
We often get the question of how we select our startups and why. Not only from startups but also from Angel investors. That’s why we decided to write a series of blogposts especially targeted at new (informal) investors. So you can learn from the lessons we learned in the last few years.
As an investor, the selection process is the most important part of our job. We can support and help a startup as much as we want, but when the basis is not right it will never flourish. To be sure our selection process is well thought out and consistent we have written an investment thesis.
An investment thesis is a set of beliefs that we use to decide whether to invest or not and also describes a macro-level view of how we see the world. It is the foundation of our selection process and the first step to decide whether we take an in-depth look into a startup or not.
I won’t share the whole thesis with you, but there are two beliefs I want to talk about:
- The time of the unicorn is over. We need revenue-driven and problem-solving startups.
- Lean Startup is highly effective. Easy in theory, but hard in practice.
These two beliefs are the foundation of how we make our investment decisions. It means that we don’t invest in ‘Passion’ products like social media apps. We only invest in startups that solve a problem. It doesn’t have to be the cure for cancer, as long the problem is something people are willing to pay for. We would never have invested in Giphy for example but would have invested in Dropbox. Dropbox solves a problem that people are willing to pay for. This focus on revenue is not unique to NEXT Amsterdam. In the US some of the major VC funds are looking more and more into what they call sustainable startups. Startups that can sustain themselves with their revenue and use VC money for explosive growth. We noticed that there is some confusion between the Impact Goals from the UN and the term sustainable startups, that is why we like to call them revenue-driven.
The second belief is about Lean Startup. We learned that it is easy to read the books and the blog posts, but that it is extremely hard to put Lean Startup into practice. Our support framework is heavily based on Lean Startup. We believe in the principles and adapted the methodology in such a way that it fits our way of working and our view of how to mentor and support startups. We created our own NEXT canvas and experiment cards and help startup founders run Lean Startup effectively over a longer period of time. If they don’t believe in Lean Startup, we are not the investor to get on board.
These two beliefs are of course only a small set of our whole investment thesis. In our thesis we also talk about why we focus on the earliest stage, why founders are interested in NEXT, etc. It is the basis for building a successful startup portfolio.
After we decided whether a startup fits into our investment thesis, there are four more criteria that we test on. We look at the Team, Market, Problem, and current Solution. You can read about that in this blogpost.