As a passionate investor, entrepreneur, and operator, I'm very excited to hear what advice and guidance these distinguished panelists have to give first-time tech investors. After all, it is incredibly difficult to project the potential success of a startup!
VCs have made an industry out of trying to get these bold predictions right more times than they get it wrong. Although the failure rate of startups is high, VCs understand the implications of the Pareto Principle in how it relates to startups, which is that, generally speaking, 20% will outperform the other 80% combined. This is partly why VCs invest in diversified funds of at least 10 companies. Just like in the stock market, you must be prepared to experience loses on some companies but, if your analysis is sound, you should also make some big wins that bring in 10x returns.
Understanding how important it is to invest in a diversified range of companies is one fundamental of tech investing. Another fundamental is to study and implement the tools that established players use to measure startups.
At Morgan Hill, we have put together a data-driven Investment Assessment to help us and our VC partners objectively measure the status of a company and determine the best investment strategy going forward. Built around our Path to Value methodology, the Investment Assessment acts like a scorecard for understanding:
- How aligned the company is (based on the five pillars of a successful startup)
- How mature the company is as a whole (done by mapping the company along the continuum of growth, from Discovery to Validation, Efficiency to Scale)
- What type of funding it is ready for (based on its alignment and maturity score
Investment Assessment Chart: How You Can Measure Startups