As regular readers will know Forward Partners invests in companies at idea stage, when there is literally nothing more than an entrepreneur and a plan. I’m frequently asked how we can do that and hope to make great returns given the risks of investing at this stage.
The answer to that question has many parts, not least that we have a product and growth team with a lot of experience helping entrepreneurs turn their ideas into great companies, but the one I’m going to focus on today is how we assess whether an idea is mature enough to take significant investment and become a business.
- There’s a great product idea – typically an exciting use case or exciting solution to a difficult problem, backed up by some objective desk research
- There’s a deep understanding of the market – customer behaviours and motivations, supply chain, pricing, go-to-market etc.
- The competitive environment is benign – competitors are properly understood and differentiation is clear (note the properly…)
- Business fundamentals are strong – there’s a clear picture of how margins, customer acquisition costs, and customer life time value will look at scale
- Basis for long term competitive advantage – barriers to entry are clear, at least at scale
- Right skills – the founder is well suited to the opportunity
- Compelling plan for the first year
It took us a while to understand the importance of this last point. Venture capital works best when execution is fast and progress is rapid. Every founder goes through a period of exploration and in most cases there are periods that I characterise as ‘meandering’ – new ideas are explored, information is gathered, connections are made, but there’s no clear progress. Then (for the lucky ones at least) the stars align, a strong hypothesis emerges and a plan naturally comes next. That’s the point when we like to invest and help companies accelerate. We will help founders on their journey up to that point, but investing before the hypothesis is strong enough to generate a clear plan creates challenges because the idea isn’t yet ready to become a business and progress won’t be rapid.