How the sausage is made. Part 2: Selecting

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This week we’ll be diving into venture investing again for part two of “How the Sausage is Made”. This week we’ll be covering the second pillar of venture capital: Selecting. If you missed part one: Sourcing, you can find it here.

Now that you’ve put the long, hard work into building relationships that will unlock access to great investment opportunities and have a pipeline of deals at your disposal (Sourcing), it’s time to start filtering. How you filter opportunities is guided by an investment thesis. Your thesis is a set of principles you follow in order to maximise your returns. It’s equally critical in mitigating your exposure to losses. For example; I don’t have a clue about the biotech industry so I have no business investing in it. Investing in something you don’t understand beyond the surface level is a quick way to lose money, no matter how “amazing” a deal appears to be. Anybody who argues otherwise probably frequents casinos.

Your investment thesis is generally guided by a few criteria:

Investment horizon

How long do you plan to hold your investments? In venture, investments generally take 5 - 10 years to mature. That’s a long time to have your money locked up, but that patience can lead to returns like no other asset class…

Target return

How much are you hoping to earn? Are you hoping for a 10x return? Or are you only looking to double your money? If it’s the latter, you’re probably better off investing in the S&P 500 because the risk profile is far lower.

Industry sectors

As I alluded to earlier, you’ve no business investing in complex sectors you don’t understand. If you hold knowledge and experience relevant to a specific industry such as finance or eCommerce, it might make sense to focus your investments there.

Stage of investment

Will you invest in early or growth-stage companies? The earlier you invest, the larger the potential return but also the more risk you’re exposed to. Growth stage companies won’t return as much but the risk is greatly reduced.

Geographical focus

In what countries or regions will you look for deal flow? As an individual, it’s likely you’ll only have access to deals from the city or country you live in. Investment firms or platforms might focus on larger regions like the EU, North America or Asia.

Business model

In some cases, you might also have a preference for specific business models. This can be based both on your professional experience and your risk profile. For example; B2B (business-to-business) is generally considered less risky than B2C (business-to-consumer).

If you’re presented a deal that fits all the criteria above, it’s time to evaluate its potential. This is where due diligence begins. Due diligence usually consists of two stages; An initial light touch phase where key items such as the problem, solution, market, business model, go-to-market strategy, traction, competitive landscape and funding requirements are all evaluated at a high level. If, after this light touch phase, you still find the deal compelling, you might dive deeper into the following areas:

Founding team

• What qualifications and experience do the founders have?

• Do they have previous startup experience or relevant professional experience?

• Can this team execute their business plan effectively?

• What picture do formal and backdoor reference checks paint?

Product innovation

• What makes this company’s product unique?

• How will this product disrupt their industry?

• What are the plans for future product innovation?

• Do they have any patents, trademarks, or other intellectual property protection?

Market potential

• What is the company’s target market and what is the size of that market?

• What is the competitive landscape and what makes this company unique?

• How big could the business grow within your investment horizon?

Market Traction

• How good does early customer engagement and user adoption look?

• What are the sales and marketing strategies and how effective are they/could they be?

• Is there any feedback or satisfaction data from customers?

Financial viability

• Look at the company's financial statements, such as their balance sheets, income statements, and cash flow statements.

• How is the company growing and how does it plan to grow in the future? Is it on a path to profitability? How long will that take?

• How will the money raised be used?

Regulatory and Legal

• Does the company comply with relevant regulations?

• Are there any potential legal risks or pending lawsuits?

So there you have it, a whistle-stop tour on Selecting the best deals. As you can see, there’s quite a lot that goes into evaluating whether an opportunity is suitable or not. Even the above doesn’t cover all aspects of due diligence and all the information generally isn’t available to you either, so oftentimes you’ve got to make some gut decisions. At this point though it’s time to decide. Given all the information provided and your understanding of it, do you invest in this company?

Unless this is your full time job, you can see how Sourcing and Selecting high quality private market investment opportunities is all but impossible for the average retail investor. They just don’t have the networks, time or knowledge to do it successfully. This is why we started PitchedIt. To be a trustworthy and transparent partner to retail investors, helping them easily diversify into private markets. As retail investors ourselves, this is exactly the product we wanted but didn’t exist. So we created it…

What we’ve been working on at PitchedIt

We’ve mostly been focused on CBI matters this week, moving closer and closer to authorisation! We also attended a great friends wedding on Friday so that cut us a day short.

• Continued refactor of investment flows. ~80% completion 🛠

• Built application form for inbound investment opportunities 📑

• Improved educational tools on investor dashboard 📚

• Continued preparation for upcoming investor pitches 🎤

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders