How to invest in the next unicorn via Equity crowdfunding

Interview with Klaudija Budreikaitė, the Senior investment associate and CFO at 70 Ventures.

To find and invest in the next unicorn via Equity crowdfunding you have to apply a similar approach as Venture capital investors since both investment types share a lot in common. So, let's ask Kludija, how they choose start-ups to invest. 

Thank you very much for joining us today. Please tell us a bit about the 70V. 

70V is 2 in 1 – an early-stage venture capital fund and accelerator for B2B companies. Our unique value proposition is a revenue acceleration program where we work with each of our portfolio companies individually and develop a tailor-made go-to-market strategy. Our initial ticket size for pre-seed investment starts at 50k EUR. If the acceleration program shows good results and the portfolio company reaches pre-determined revenue KPIs we later follow up in a seed round. 

You receive 100s or even 1000s applications per month, how do you pick up ones to evaluate? 

Talking about inbound applications assessment the initial selection criteria is the quality of the application. Furthermore, we include a number of questions in the application that might seem not so relevant to outsiders but it helps us determine if the company will be a good fit for our acceleration program.

If we talk about investment evaluation in general I would say there are a few criteria.

Team competence is the most important part of the selection criteria. At early-stage investment there typically is no business yet, therefore the funds trust their money based on the team's competencies and drive. Team diversity is a very important factor. One person could be very smart but will never cover all areas required to make a successful business. 

Has the company done a proper job defining competitors and market potential e.g. if the company says they do not have competitors, then sorry, it means they do not understand the market since in all segments competition exists. 

Another thing is the total addressable market and scalability it should ensure huge business growth potential as investors expect to receive 100x returns on investments.

When it comes to financial results, a key precondition for us is that a company made at least some sales which is an indicator that the product is needed in the market and the company knows how to sell it. 

How do you evaluate market fit and can the company scale in the market to become a multi-million EUR company? 

It is important to understand that such investments are long-term thus to make a successful investment you need to predict how the market and product will develop in 5-10 years. 

It is obvious to do so you need expert knowledge in a particular industry, therefore never invest in industries that you do not understand. 

And if you have such a knowledge level you will know what parameters to analyze to understand product fit and market potential.

How do you make sure that the company team has all the necessary qualities/skills to reach planned goals? 

Usually, we look for two types of competencies, a CEO/salesperson who knows how to run a business and sell products and a product person who understands how to develop the product and market needs.

To make sure that the team has the required knowledge we evaluate the past experience and run interviews. For crowdfunding investors, I would suggest checking the LinkedIn profiles of key team members and evaluating are their past experience and results are relevant. 

What are key metrics that you evaluate in a business case or historic financial performance (if such exists)? 

In our case, we invest in companies that started recently and have little history so we do not evaluate historic performance, except for initial sales. 

In the case of the forecast, we are focusing mainly on forecasted revenue data and companies’ ability to reach planned sales results.  

How do you evaluate exit potential? Do you think/evaluate how the exit will be performed?

In venture capital, we expect to exit from a deal in around 8 to 10 years therefore we are not relying on forecasts of how the exits may turn out as returns heavily depend on the timeline and current market situations which might change substantially. 

What are your rules when investing in early-stage companies?  

The first and most important part is the team. We are looking for a team that is passionate about idea and can deliver. As well we insist that the main team focuses only on this project and do not have side projects, thus we ensure that they are interested to make the most out of our investments. 

Also, as mentioned earlier, I highly encourage you not to invest in industries you do not understand.

Diversification is key, 90% of startups fail, therefore you should never invest all your money in one project. 

Klaudija thank you very much for the interview, I believe that this will help a lot of people to understand how to invest in early-stage companies.