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:
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.
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:
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.