The product is the company

This piece by Anna Boffetta (above) originally appeared in the Dec16/Jan17 issue of Courier Magazine.

Venture capital is a shoe-leather industry. VCs rack up a lot of miles, and meet a lot of fascinating entrepreneurs. Due to the volume of great businesses, the job requires a well-refined system to appraise what a good company looks like.

You can divide products and services into three major categories: core technologies; transactions and subscriptions; networks and communities.

Core Technology

Solving problems in a fundamentally new way, due to the strength of the technology alone. These companies are not always focused on a specific industry, and the founders are usually extremely smart technologists, in particular PhDs. DeepMind, Magic Leap, and one of our investments, Magic Pony, are great examples of this type of company.

I look at the underlying technology, its uniqueness, its efficiencies, and how it could be applied within a particular industry, or to improve the success of a specific task. After I have honed-in on this, I then look into commercial application.

Transactions and Subscriptions

The vast majority of tech startups fall under this category. The stats do the talking for these companies. I look for product/market fit, traction, and scalability. The metrics that I focus on are user-data - conversion, retention and churn; revenues; and opportunities for product up-selling and cross-selling. I look for growth and optimisation month-on-month: I like to see that companies are getting bigger, and that they are intelligently improving the product and driving revenue.

Examples of companies in this category are Airbnb, TransferWise, Slack, Yoox–Net A Porter, Tictail, and Talend. (We invested in the latter three.)

Network or Community

The value for these products lies in the users. Most of these products/services are mobile first, and laser-focused on a particular industry: social networks, transportation apps, web curation, information services.

I look at cohorts, focusing on conversion from downloads or visits into users – specifically at how many return monthly, weekly, and daily. I also look at churn after one, three, six and twelve months, three months, six months, and 12 months. I also want to understand how the company acquired their users: was it through organic growth, or paid channels?

This process helps me understand why people will use this product, and the value of the data generated by these users. User-data can shape monetization opportunities: through lead generation, partnerships, or data integration.

Examples include Facebook, Whatsapp, Clue, and two of our investments Citymapper and Vivino.

Common Characteristics of great products

There are certain general characteristics that the leading products and services have in common.

I believe that user experience (UX) is something reflects the culture of the company, its soul. If an investor intends to learn more about a company, they should meet the product/UX team, as doing so will shed light on the team’s ability to adapt and iterate based on user-feedback.

How the product differs from competitors is equally vital, and can manifest in very different ways: price, offer, convenience, efficiency, reliability, integration, use-case, or acquisition channels.

Sustainability is important, but difficult to analyse. It can be argued that most successful businesses started as arbitrages, and then redefined the markets that they serve. Therefore their sustainability was born from the fact that they (at least partially) created their own market-expectations, rather than demonstrated that they could be ‘sustainable’ in existing conditions.

The main thing to remember is that a ‘product’ involves more than just a product team. Product is the net-result of the whole team’s effort. For your product or service to really ‘click’ with the market, it has to click within the company first.

Anna Boffetta is an Associate at Balderton Capital

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