This is Part 3 of our Investing series.
At NEXT Amsterdam we believe in helping others. Not only startup founders but also our fellow (informal) investors. That is why we are sharing our knowledge and experience in a series of blog posts about how and why we invest.
Two weeks ago we wrote about the investment thesis as the basis of every investment decision we make. When a startup fits into our investment thesis, there are four more criteria we select on. The team is by far the most important criterion. If we would assign percentages to the four criteria, the team would make up 60–70% of the whole selection decision. The problem a startup solves and the market they are in are equally important. The startup’s current solution almost has no influence on our decision, as long as the first 3 criteria are top-notch.
So how do we select startups?
Because we invest in the earliest stage and offer hands-on support, the team is the most important criteria. We need to be able to work with the startup on a daily basis for the next two years. If it doesn’t feel right, we don’t invest. We don’t want to work with assholes. It is as easy as that. We look for trustworthiness, passion to solve the problem and commitment. A question we regularly ask is: “Are you willing to spend the coming 5 to 7 years of your life to make this work”. If the answer is anything else than a hearty YES, we don’t invest.
We also look at the composition of the founding team. We want to have at least a business and a technical co-founder in the founding team. One can not do without the other. You can be a brilliant sales guy, but without a technical counterpart, you can never move fast enough to become successful. It is like building a first-class restaurant without having a first-class cook. Nobody runs a restaurant with an external catering service, right?
We also consider a female founder a big plus. Our goal is that at least 50% of our portfolio companies have a female founder. We believe in mixed teams.
During the selection process, we give the teams a sneak preview of how we work. We do two to three sessions with them, so we can learn how they respond to us and the framework we developed, but that gives them also a view into how we work. This way the startup team can review us as much as we can review them. Being a very hands-on investor, this is an important step. We usually fill in a NEXT or Business Model canvas and run an experiment. We can evaluate how the team responds to experiments and see how fast their developer can act. Speed and focus is everything in the earliest stage.
Besides looking at the team, we also determine if we have a ‘feeling’ with the problem the startup tries to solve. We only invest in Web/Mobile technology startups, like described in our investment thesis, but even in Web/Mobile, there are some areas we just don’t want to be in. Again, because we are very hands-on it is important for us to have an affinity with the problem the startups are solving. It is a soft decision, but if we don’t care about the problem the startups try to solve, we can not offer our best support.
If the startup doesn’t solve a problem, we have passed on them way before this part. Since we only invest in problem-solving and revenue-driven startups.
We have a quick look at the market the startup is in. Is it big enough to get to say 5 to 20 million in revenue quickly or are they targeting such a niche that it will never be bigger than a lifestyle business?
If the startups already have a solution, we have a look, but they are not required to have a solution yet. Since we believe strongly in Lean Startup we rather see the startup validating their ideas first and building a solution later. It does give us an insight into how the team executes.
At this point, we have determined whether the startup is in line with our investment thesis and our four selection criteria. We don’t like to keep startups dangling in uncertainty, so we either tell them we don’t invest and why, or we make them an offer. We never tell them maybe or ‘come back in half a year’. We hated that when investors told us that in the past when we were raising money.
When the startup is not yet incorporated we help them with the process and directly ask for equity. Otherwise, we propose a convertible note since it is so much cheaper and easier to do than an equity deal. But more on that in a next blogpost!