Our scope and our sweet spot

December 29, 2009

Between my partner and I, we receive 500~1000 investment opportunities per year. Of course, we do not invest in all but a few of these annually, if even that. Still, I value the chance to review this deal flow and appreciate the passion and effort put in by every entrepreneur.

A significant percentage of our deal flow arrives “over the transom,” i.e. absent any endorsed introduction. Although it’s highly unusual that we would end up investing directly in such deals, I welcome these opportunities for market visibility and especially the potential relevance with our existing portfolio companies.

Reviewing most new deals, however, often takes a back seat to assisting my existing portfolio companies. Although some VCs balance their priorities a bit differently, I choose to work tirelessly for the entrepreneurs in my portfolio first, then secondarily allocate my spare time to reviewing, meeting, and providing thoughtful feedback to new opportunities.

Accordingly, I am forced to be ruthlessly efficient on vetting new deals. Some VCs are great at this; I probably still have a lot of room for improvement on time efficiency.

One way to be ruthlessly efficient is to quickly seek disconfirming evidence. If an opportunity falls clearly outside our investment scope, I usually dismiss it immediately. For example, we don’t invest in semiconductor deals. Such opportunities are instant declines. Another immediate NoGo are the mass email deals on which I figure among a number of recipients.

I try to be much more reflective, however, on opportunities which fit within our investment scope and, even more importantly, within our sweet spot.

I draw the distinction between « scope » and « sweet spot » and define them as follows (as per Truffle’s IT practice):

  • Our investment scope:  business opportunities operating in the following domains:  digital media, mobile, telecommunications, and software, throughout Europe

  • Our investment sweet spot:
    • markets:  all of the above domains, sometimes with certain preferences which shift with the times (e.g. we prefer SaaS over tradtional software models, mobile gaming over online gaming, etc.)
    • geographies:  regions of proximity, i.e. France, Benelux, UK, Switzerland, and sometimes Germany and Spain
    • stage: companies at the revenue stage, ideally with 3~30M€ in revenues.  We rarely invest below this revenue revenue range, mainly due to the risk profile we’ve promised to our LPs and the minimum capital we need to invest at reasonable deal metrics.
    • structure:  we are not shy of special situations, such as spin-offs, carve-outs, restarts, secondaries or partial cash-outs, but also enjoy plain vanilla growth and venture financing.  We also prefer opportunities without an unwieldy number of VCs.  We think a startup should view VCs like martinis, i.e. 1 is very good, 2 under certain circumstances can be even better, but 3 or more is a recipe for illness.
    • management:  last but not least, we love repeat entrepreneurs, particularly those who have experienced failure.

So, with all due respect to the entrepreneurs who represent my raison d’être, if I had a wish list for remaining the untalented and lazy VC that I am, it would be as follows:

  1. If your opportunity falls outside of our scope, please do not expect a response.
  2. If your venture fits within our sweet spot, I am definitely interested and will give your opportunity careful consideration.
  3. The third case is more nuanced, i.e. where your opportunity falls within our scope yet does not clearly fit within our sweet spot.  Often ventures in a domain we like but that are simply too early-stage for us comprise this category.  In this instance, I will carefully review the opportunity, though perhaps with a bit less urgency than others that are more compelling.  You can help me increase the priority of reviewing such opportunities by explaining in your introductory email why despite falling outside our sweet spot, you feel this opportunity is relevant for Truffle.

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posted in venture capital by mark

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