Having experienced a tough investment season last year, I was reviewing the early-stage deals closed by the top VCs in 2019 and wanted to figure out where they were pouring money into. Hopefully, I could learn something from there and find my next unicorn.
Before reviewing the list, I expected to see many investments in deep-tech startups. However, surprisingly, most of the invested companies do not have any proprietary deep technology. Instead, they are building something on top of some commonly available technologies and making it as a product. From my perspective, most of the companies are competing by smart business model/strategy, products with superior user experience, and/or high efficiency in executing the business idea.
Being a great fan of “deep-tech” — something that is rare, new, and super disruptive, I was a bit disappointed.
But all of a sudden, I realized something — investing in “deep-tech” companies is just a no-brainer, while the “normal” of VC investing will be finding out the promising companies that do not show absolute/obvious advantages.
For the no-brainers, everyone knows whether to invest or not. However, it requires a lot of subjective judgment to find out and evaluate the “promising” ones.
I will use three short cases to illustrate my understanding.
Case 1: Startup A
This is a deal that we closed last year. The process of closing this deal was very smooth, as everything looked great to us.
The company is working on autonomous driving buses. Based on our research, the market size is big — though not as huge as that of the passenger car market. The founding team is very strong, and they came out from an existing autonomous driving company. Apparently, the team is unique with a lot of experience and deep industry knowledge, and it is difficult to find a comparable team on the market. On the other side, the co-investors are also decent, and we co-invested in some other companies before.
Everything is just perfect. So we closed the deal very quickly.
Case 2: Startup B
This is also a company that we invested in last year. The company is working on IoT network infrastructure, the market of which is undoubtedly huge.
Though the company does not have many proprietary technologies, the team still provides a good combination of knowledge and experience that will guarantee the company has a high chance to win. Some team member has experience in managing similar products, some team member is actively involved in the developer community for this technology, and another team member has rich experience in finance and fundraising.
It did not take us a lot of time to make an investment decision for this case as well, as they have everything to succeed.
Case 3: Startup C
This is not a deal from my company but a story I read online.
The company is from China and working on fresh food retail and delivery. By building distributed warehouses in cities, the company offers 2-hour delivery to consumers at affordable prices. The company is founded about 5 years ago and now valued at close to $4 billion.
When I dig deeper into the founding team, what I found was not something that would catch my eyes on the first second. The founder worked for a large corporate company for 12 years after college — which is a red flag to me as it indicates the founder is very risk-averse. The founder also did not have much direct experience in supply chain and logistics, while the business is very execution-heavy and requires a lot of related experience.
However, in the following 5 years, the founder has successfully led his team to experiment with different business models, test different prototypes, and compete heavily with the new-comers.
I started wondering: how could an investor determine this is the right team to do this business/execution at the early stage? I deeply believe that the investors have spent tremendous time talking to the founders and learned about their personalities, incentives, and capabilities/skills. Only by learning as much as possible about the team/founder could the investors determine whether this is the right team to execute this idea.
To summarize:
For companies such as Startup A that have proprietary technology, knowledge, and/or experience, it is a no-brainer to make an investment.
For companies such as Startup B that do not have many proprietary resources (we can expect the company to face a lot of competitions) but have the right combination of people with the right skill sets, we can also easily believe this is the right team to execute this business/idea.
For companies such as Startup C that do not have any proprietary resource or a strong team with the right combination of skill sets, it requires a lot of work for the investors to make the judgment — to determine if the team still has the highest chance to win the potential competition.
By looking into the deals closed by the top VCs, I realized that only a handful of deals come from companies like Startup A or Startup B, while many will come from companies like Startup C.
I believe the type-C deals have demonstrated the beauty of being a VC investor — you can only win your competitors by making your own subjective judgments based on your own understanding of life, human being, and even the universe.