How we use our thesis to evaluate investments

(N.B. This is a continuation of our previous post explaining our investment thesis. We recommend reading the first post before digging in below.)

In a typical twelve month period, the partners at Connect evaluate approximately 1,500 companies. Compounding the problem of market size is the fact that we’re a low-volume, high conviction, partner-only fund. This means the three partners at Connect have to sift through these 1,500 opportunities to find the 200–300 we want to meet in person and the 100 we spend significant time with, leading to the 8–10 companies we ultimately invest in. That’s a <1% conversion rate to new investments each year.

How do we approach it?

Most VCs look at market potential, team, GTM strategy, business model, etc. We look at those things as well — but we also go a step further. At Connect, we want to identify the best product companies in Europe. To do that, we use a filter that is unique to us: our investment thesis.

Opinionated products, crafted with love and loved by many.

In a previous post, we laid out what our thesis is and why it’s so important in guiding our investment decisions. In this post, we’ve outlined how we use the thesis to evaluate companies.

Guiding principles

We use our thesis to generate questions around each concept contained within it. These questions aren’t written out in an evaluation form. They’re some of the mental models we’ve developed over time by working with the outstanding product companies in the Connect portfolio. We continue to develop those models as our portfolio grows and technology and markets change.

Companies don’t have to excel against every aspect of the thesis at the time of investment, but we do need to believe they can over time. Additionally, not all questions are applicable to every company we spend time with due to differences in markets, technology and industry.

Our goal with this post is twofold: building more transparency into how we make our investment decisions and helping product companies leverage what we’ve learned to understand areas of strength and areas for improvement. Any feedback on the questions is greatly appreciated!

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Evaluation questions

Opinionated products, crafted with love and loved by many.

Opinionated:

• What are the founders’ insights? Are they widely held or not?
• What do these insights allow the founders to say no to and to focus on? In other words, what hard problem(s) are they going to solve and what problems are they going to live with?
• What evidence do we have that the founders are willing to make bold or unconventional choices to solve this problem?
• Will this product be a new solution to an existing problem, or a previously unsolved problem?
• Will this product make what came before seem outdated, clunky, inefficient, costly or painful?
• What is the defining attribute that makes the product stand out?
• Does the product have the potential for creating a new category (vs being a better product in an existing category)?

Products:

• How much of the product value is driven by and/or limited by off-line factors?
• How much of the user experience is delivered and consumed via software and how much of the non-software components can become productised?
• How much of the company’s growth will be driven by and/or limited by off-line factors?

Crafted:

• What product development culture do the founders want to build?
• Are the founders problem oriented or solution oriented?
• Do the founders understand how to do product discovery?
• How much time do the founders spend talking with potential users?
• How well do the founders understand and spend time with alternative solutions?
• What do we know from previous products they’ve built?
• Are there wireframes or a prototype to evaluate? If not, why?
• Why did they build [x] feature?
• What is the quality of the onboarding experience?
• Do they check intuition with data?

With Love:

Love for the Product

• Has one of the founders been part of a product team before? If so, in what role?
• Are the early hires going to be in product and engineering? If not, why?
• What are their favourite books / blogs / etc on product development?
• Do the founders view everyone in the company as contributing to the product?

Love for the Problem‍

• Have the founders experienced the problem first-hand?
• How much empathy do they / can they have with the problem?
• Do the founders have market fit (industry experience, B2B vs B2C, GTM strategy, etc)?
• Does the team obsess over customers or over the competition?

Love for the Users

• Does the product serve the needs of the users and the business or only the needs of the business?
• Do the founders focus on outcomes (value) or output (features)?
• Do the founders put the end-user at the centre of the product design process?
• Do they have a system in place for collecting user feedback in the product development process?

Loved

• If the product is live, are the engagement metrics stellar?
• Does the product fix a broken experience by removing user complexity?
• Is the product intelligent (e.g. augments the user, automates tasks, leverages data, learns with usage, gets better over time, creates a system)?
• Is the pain so perennial that the user will adopt the product for the long term?
• Is this a product that can become habit-forming?
• Can the product create enough value that users will become advocates?
• Do users care enough to provide unprompted feedback?

By Many

• How would the product deliver $100m in revenue (i.e. how many users and at what price, ad rate, etc)?
• How accessible are these target users?
• Is the problem hard to solve at scale?
• Which category will this company create or fit into? What’s the category potential?
  Will the innovation in the user experience create behavioural changes and drive an expansion of the total addressable market?

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If you have feedback on any of the above, we’d love to hear from you, please feel free to leave comments directly. And if our beliefs about product resonate with you, stay connected!

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