Sourcing Deals: How We Find, Evaluate and Decide to Invest in Startups

December 11, 2020

As venture investors, one of the most common questions we get asked is how we find compelling deals in the crowded consumer market and decide to add them to our portfolio. We understand, of course; this is the essence of what we do.

As consumer VC’s there are roughly 30,000 brands that fit within our criteria for stage, sector, and geography.

While every VC has its own process for sourcing and evaluating deals, we’ve developed our own proprietary method that can whittle down a field of 30,000 to just one or two potential investments in a given consumer category. Curious how we do it? It all starts with locating high-potential startups.

How We Find Deals

VCs can review anywhere from 100 to 1,000 startups before deciding to invest in just one. Without healthy deal flow, it’s easy to miss out on high-performing companies. We typically find deals via one of three methods:

  • Network: VCs rely on their network to connect to promising founders whose startups fit the investment thesis. At H Venture Partners, we have decades of experience working on over 100 consumer brands, which has led to a rich, diverse network. Highly connected in the consumer industry, our network often knows the types of companies we look to invest in, and will send them our way.
  • Inbounds: When founders know who you are and what you offer, they often want to work with you -- and will reach out to make the connection. A VC’s brand can improve deal flow, and is typically built through thought leadership and value-add services, like H Venture’s deep consumer experience and a strong network that can accelerate a startup’s performance.
  • Thesis-Driven: We focus on specific categories of the consumer market, like food, beverage, apparel, beauty, home care, personal care, baby products, caregiving and more. Sometimes, we reach out to high-performing startups in these categories where we see unmet needs in the market.

Once we’ve generated a solid pipeline of deals, we evaluate them using a proprietary screening methodology to determine which deals have the best risk adjusted return potential.

How We Evaluate Deals

We evaluate brands category by category, meaning we’ll see how skincare brands stack up against other skincare brands, and how home brands compare to other home brands.

Every VC has their own diligence process. Ours starts with what we call our triage form, which is a proprietary, weighted scorecard that we developed to quickly score opportunities. We look for things like strong management teams, meaning teams that have channel and domain expertise. We look for dynamic, well-rounded teams that have had success in the past and experience in their category.

Our triage form also analyzes the brand’s value proposition, differentiation, supply chain, scalability and barriers to entry in a given market. Does the brand have a strong form of intellectual property, like our investment in Cerebelly, a patented line of baby food developed by a Stanford neurosurgeon and mom? Other critical aspects of how we triage companies are financial factors, like capital efficiency, valuation and deal terms.

Investment Funnel

We first start with our investment thesis, and landscape the thousands brands based on this criteria. For our specific thesis in pet, we found 111 companies that aligned. Of those 111, we decided to proactively reach out to 24 of which we landed 14 initial conversations. After our initial triage of these companies, four were selected for further evaluation. At this stage we’re performing deeper due diligence on aspects of the investment such as:

  • Value proposition: Does an investment have a clearly-defined problem, which is a true unmet need in the market? Does an investment have clear differentiation and a unique business model that will set it apart from competitors?
  • Management team: Does the team have domain expertise? So, if it’s a pet brand, has one of the founders worked for 20 years at a major pet company, like Purina? Is there channel expertise, with the potential to operate in multiple channels like DTC, wholesale and retail? Has the team previously worked at a startup, or took a company to a successful exit? Do the co-founders have a good working relationship, and complementary skills?
  • Scalability: We like to invest in brands that have the potential to be $1B brands. We start by looking at a company’s total addressable market, which can be defined by demographic characteristics such as income and age. We look for $1,000 Customer Lifetime Revenue Value; Peloton fits, with its a $2,000 bike, or tampons, which the average woman will spend $5,000 on over her lifetime. We’ll also look for omni-channel brands, a robust pipeline of future products, and how many categories the investment might reach.
  • Risks: We want to understand barriers to success for a given company, as well as how a team mitigates them. We look for characteristics like an efficient supply chain, capitalization efficiency (can you turn $1 investment into $2 of revenue?), product development that bears results, and obvious exits for the brand.

Let’s just take the pet category, for instance. This entire process yielded two top candidates, and we’ll ultimately select one to invest in.

In 2020, H Ventures invested in five companies across several consumer categories - and we’ll look to double that in 2021. We’re selective, yes -- but always so excited to find a company that makes it through the funnel and into our portfolio.

Investing in a beautiful life.

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