What makes a great investment?
This is a question I have gotten asked countless times during my 20+ year career in the world of Venture Capital. While I wish I could tell you I have the ingredient for 100% success, there will always be factors out of our control, especially in early-stage investing which is the focus for us at F2 Venture Capital.
However, I can say with confidence that two key factors to making great investments are luck and timing.
By timing, I am referring to the broad condition of the ecosystem- something that is hard to define, and harder to control.
You can have an incredible team and a top-tier product, but enter the market too soon and you could be waiting for a penny that will never drop. Then again, enter too late and you may have missed your window of opportunity and be left fighting a losing battle in a too-saturated market.
Of course, there are ways to try to mitigate the risk of bad timing like intensive market research and competitor analyses, but it will remain one of the most elusive aspects of startup success.
Then there is luck. While this may seem even more out of our hands than timing, I would have to argue along the lines of Thomas Jefferson- the harder we work, the luckier we get. To me, luck is about identifying and acting on good opportunities.
Ultimately, the harder you work to understand your industry and understand your own strengths, the easier it will be to ‘get lucky.’
Besides timing and luck, there are other factors that go into a solid investment that are firmly in our control, the most important three being team, market, and tech.
The strength of the founding team is one of the most telling factors for future success. Founders with the ability to dream of a big vision and tell their story will be able to attract the top talent and drive their companies into leadership positions in their respective markets.
The most important factor to consider is whether the market your startup is operating in is big enough to build a multi-billion-dollar business. But your analyses should not stop there. A large market could also be a crowded market. In this case, your startup must have the breakthrough technology to leapfrog over your competition and dominate. If the market is still a niche or growing, then your startup should be focused on becoming a leader as quickly as possible with differentiated technology that could create barriers to entry so your competitors cannot leapfrog over you.
In both cases- a growing or saturated market, strong technology that is differentiated and creates barriers to entry is paramount.
When making investments, the fewer external factors involved, the higher the chance of success. For founders and investors alike this means ensuring a solid team, a suitable market, and a defensible technology from the get-go.
The notion that luck and timing, two factors that are hard to control, play such a significant role in the success or failure of a startup are hard pills to swallow. However, the well-informed founder is the strongest founder, and understanding which risks you can mitigate, and which you cannot is part and parcel of both the founder and investor journey.