Every investor has specific criteria for what makes a great venture investment. And through my work with The Syndicate podcast (interviewing 100s of top angels, VCs and syndicate leads) as well as connecting with 700+ climate funds, incubators and accelerators with 4WARD.VC’s climate syndicate and climate VC database efforts, I’ve definitely seen many different approaches.
From some VCs focused solely on specific verticals like carbon capture, circular economy or biotech to accelerators & incubators funding anything with a pulse, creating entire startup indexes based on geography or sector.
And that’s just the initial filter VCs have: does this fit our thesis, or not?
But then, it gets specific — pitch decks, presentations, due diligence… There’s a lot that goes into making a bet on a startup. And every investor/fund does this a bit differently.
Some rely on gut instincts, others on metrics/traction, reference calls or IP. Many funds vote based on consensus and party rounds while still others insist on being contrarian…
None of which tells you a whole heck of a lot — either as a startup or investor.
Even looking at a VC’s track record is often suspect — many investments are sheer dumb luck: being in the right place at the right time, knowing the right people, riding the rising tides of a bull market.
And things get even harder to suss out due to momentum.
I.e. Strength leads to strength…
So the funds and investors with the biggest wins attract not only the most capital, but also, the most attractive startups, investors and co-investors, creating a self-fulfilling flywheel of success (unless your Masa, of course 🙂
But if you came to this article, odds are you’re either a climate startup looking for funding or an investor looking to hone your thesis.
Unfortunately, there is no perfect answer. The best I can give you 4WARD.VC’s approach to investing — the culmination of everything I’ve learned as an investor, founder and startup advisor/coach.
The 3Ts of Massive Venture Returns
Team, TAM, Timing… you’ve probably heard it before, right? But “knowing” isn’t always knowing.
Let me explain.
1. TAM: Total Addressable Market
Venture is a game of outliers — it is the ultimate go big or go home, because fund returners make up the core of a VC’s outcomes and carry and determine whether or not investors get paid and are able to raise additional funds (for more on the economics of venture and carry, see this post).
To fit that model and to achieve unicorn or decacorn status, startups NEED to be tackling HUGE problems and attacking MASSIVE markets. How else are you going to earn $200M/yr+ if the TAM’s only $200M?
No startup ever captured 100% of a market, not even Google search or Facebook (back in the day). And if you’re going to need to share the profits amongst multiple players, you better be attacking multi billion dollar markets — personally, we prefer $5–10B+ as a minimum.
But TAM isn’t everything. Timing’s arguably even more important…
2. Timing: Why Now?
The next question I ALWAYS ask founders is “Why now?” “Why was this not possible 2–3 years ago?” (Because if it was possible then, why has nobody done it?)
We look for emerging technologies and trends just starting to become possible and breakout.
Because the only thing worse than being wrong is being right, but getting the timing wrong. If you are too early or too late, you just fizzle out.
Which leads to the second part of the timing question: TAM growth rate, ie., the compounded annual growth rate (CAGR). Is this a growing/thriving industry/market, or is it on the decline?
Because a rising tide lifts all boats and the last thing VCs want to invest in is a dying market. Imagine investing now in cable TV…
Investors are in this for the long haul and want to build generation-defining companies. To do that, we need to be looking forward, not backward.
3. Team: The Most Important and Complex Factor
Everyone knows the founding team is arguably the most important aspect of any startup. But in this regard, I’m even more extreme.
Outside of raising children, NOTHING is harder than building a successful startup. From brainstorming and early prototypes to attracting talent, customers and funding, the ideal startup founder needs to be incredibly versatile, constantly growing, great at sales and leadership and able/willing to survive unbearably stressful, sometimes 100+ hour weeks, firing off best friends and laying awake wondering if the tech/funding/contracts etc… will come through in time.
It’s a stress unlike any other that no person should have to endure and VERY VERY few can successfully manage — even to only moderate levels of success.
For the ones that REALLY make it, for the ones that achieve 50… 100… 1000x+ results… they are a rare breed. A VERY rare breed, just like elite athletes, and have often experienced serious hardships in their lives that motivate them to forcibly shape their world to their will.
In a word: they are WINNERS — pure and simple.
Their force of will alone does not allow them to fail, quit or take no for an answer.
They are tenacious. They are exceptional.
Those are the types of founders we invest in. The ones where you can “feel” it. Something about this person is F*CKING extraordinary. It wouldn’t matter if it was a groundbreaking biopolymer startup (like we’re currently syndicating :), running for Senate or an ultramarathon… whatever the challenge, you would bet on this person no matter what.
That is my STRONGEST belief in VC (which I’ve also heard again and again from great investors) and the philosophy we follow with 4WARD.VC’s climate syndicate.
“Bet on the jockey, not the horse.”
Because when you bet on winners, even if it isn’t their first venture that’s a home run success, they WILL be up to bat again and eventually smash one out of the park.
The Startup Moat
Any climate startup that meets all of the above requirements is a company I want to meet. But there are several other filters as well when we evaluate companies.
Chief among these is defensibility: What makes your business different, defensible and able to scale?
- Is it a USP (unique selling proposition) that no one is able to match?
- Is it technical IP you’ve developed and patented?
- Is it network effects and lock-in that allow you to deliver more value as you scale?
What is it? What prevents others from coming and copying exactly what you’re doing?
I wish this wasn’t a necessity, but it is. I wish we could build great businesses that better the world without worrying about profit, but in order to make venture and incentives work, we need to deliver outside results.
So how can the company do that? Usually it is either
- Crushing the competition and having monopoly-esque pricing power or
- Empowering the competition and taking a meaningful cut of the transaction
Last but not least — is it a bit contrarian / crazy?
At 4WARD.VC, when it comes to investing, we like to be a bit contrarian. When everyone thinks something is a good idea, it usually isn’t. It’s too obvious, it’s too easy to replicate.
Everyone knows selling ice cream in sunny tourist hotspots is a “great idea.”
But try building a venture scale ice cream shop — it’s hard to be massively profitable when there’s another tasty competitor every block.
That’s why we like non consensus bets. That’s why we like a like sci-fi crazy in our companies…
Because otherwise, even if there aren’t competitors now, there soon will be — and margins will be squeezed to nothing. Just look at selling generic products on Amazon…
Investing in the crazy world changers?
What do you think? Are we crazy?
I certainly hope so. Because the one thing I’ve seen again and again when it comes to business is that when everyone’s going right, it pays to look left.
Does this sound like you? Are you a crazy climate founder tackling an ENORMOUS problem the world doesn’t know enough about? Are you disrupting a massive, dated industry and looking for help, hustle and capital to transform our world for the better?
If so, please apply here for funding and to pitch on The Startup Tank Climate Investor Pitch Show. We can’t promise we’ll invest, be the biggest check or be able to feature you on The Startup Tank, but we can promise that if we do invest, we will be the heart and hustler on the cap table for you and the company.
And if you’re an accredited investor or investing entity looking to learn more about 4WARD.VC’s climate syndicate, our growing climate portfolio and how you can get involved funding the world’s top early stage climate companies, please reach out here and apply.