So you have a new Smart Connected Product Idea and are looking to raise venture capital (VCs). This article summarizes some of the basics you should think about.
This article provides a VC’s viewpoint, based on an interview with Philippe Cases, who has made over 150 investments. He provides his insights on how he thinks about investing in IoT.
The first thing that investors would look into, is do you have an A-Team to invest in. Specifically, he looks for a team that:
Experienced: Your team should be experienced in the market that you are operating in. You may not have experience in all aspects. However, you can augment your experience by working with advisors or partners to increase your experience level as well as doing more work in the corresponding area.
Gets the job done: Ideally the team has experience working together as a team and delivering results. This develops over time as the team works together. In an ideal scenario team members may have working history from a previous company.
Reads the market and adjusts: Changes in the market can be subtle and not obvious if you are in the market every day. Tip: use tools like the business model canvas that encapsulates the business environment. When you review your past assumptions periodically, they can help you identify and adapt to how your market may be changing.
Invests and learns from the investments made by them and others: As a CEO, you often work as fast as possible with your head down making progress. However its important to come up for air and learn from investments made by others in the same market that you are working for.
Philippe also analyzes the market, usually the market should be big, open to new entrants and amenable to economic rents. The market environment is an indicator of revenue potential.
When presenting your product to VCs there are a few aspects to communicate clearly. Philippe is looking for the product to lead in one or more of these four areas:
Is the product:
- Market fit?
There are generally two product archetypes that VCs invest in. 70% of VCs focus on building a better mousetrap for an existing market; and 30% of VCs focus on a brave new world creating a new market that doesn’t exist. Wearables is a good example. Five years ago the introduction of fitbit was was a whole new market and provided high-risk and high-returns for their investors. This changed quickly over time after mass customer adoption and the market became established.
All companies have risks, the important thing is to know what they are and are they manageable? 90% of companies fail because of market risk. Has your product achieved product market fit? Philippe noted that 70% of his due diligence analyzes on market-related risks.
Market Validation Misconceptions
When you think about market, there is understanding the market that you play in, and market validation – two different things. Market validation plays a big role in IoT especially in consumer. For example: companies have raised capital from crowd funding sources is not evidence of product market fit. It does validate that your product works and is used by consumers; but the larger market rarely behaves the same was as early adopter customers. For commercial products having one major customer isn’t market validation either. You need to show that there is an engine to generate and handle 100s and 1000s of customers giving you a small amount of money, rather than one big customer spending millions. The problem with one customer, you focus all your resources on that customer, often to the exclusion of other the larger market.
Other types of risks. The other major types of risks are operational risks, and financial risks. Does the company have the infrastructure and systems to acquire and service customers. Does your company have enough financial capital to accelerate and grow.
Unfair advantage could be technology, funding, partner ecosystem. Often an overlooked area is working with larger firms. Big integrators are looking for leading companies to align themselves to stay at the forefront of the industry. They will be a force for you to be in market, and they have venture arms that you may be able to leverage. As an example Verizon ventures has been an accelerator of many IoT opportunities.
The bigger the competition, the more important the ecosystem is. For example if you’re competing against Microsoft, the more important that you have another big integrator (such as IBM) supporting you .
Geographic Markets Example:
In the chat arena, chat was dominated by very large players when Whatsapp and WeChat started. Whatsapp dominated in the European markets. WeChat dominated in the Chinese markets. They started as similar products but operating in totally different geography made VCs look at them very differently. They were able to grow within their respective markets and evole substantially.
Every quarter, Philippe has board meetings that reviews key criteria for market validation as well as operational risks, financial risks, and operational risks. The level of market validation and risk tolerance changes over time. At early stages you may not have any revenue and you are really focused on market validation. At later stages you may would focus more on revenue, operational and financial risks.
Investment Stages and Investment Size:
The terms for Seed round, Series A, Series B are fuzzy and often discussed based on the size or number of investment rounds. Philippe suggests a different approach: consider what stage you are at based on where you are in product development terms. What you have accomplished is more important the number of rounds of financing you have completed. This is how he looks at the growth/maturity stages:
- Family and Friends round: You have an idea, but you don’t have a product or solution.
- Seed round: You don’t have market validation, but you have a working product, and some early stage users that are providing usability feedback.
- Series A round: By this stage you have 10M+ in revenue, and you have product market fit. Regular customers using your product and generating revenue.
- Series B round: At this stage the company has product market fit and you are figuring out the best way to monetize and grow.
- Mezzanine round: at this stage is all about execution and growth.
This article is just a primer, but there are many more resources you can tap into to learn more about this space.