How to scout a high-potential startup?
In the venture capital universe, everybody is looking for a golden nugget. Which startup will be the next unicorn? Most of the startups will fail within one year, and it is sometimes impossible to know which are the trends worthy of an investment. One of my favorite examples is the Anti-Portfolio of Bessemer Venture Partners. It is one of the most respected early-stage investors but still decided not to invest in Google, Airbnb, Facebook, or Paypal.
One of our core offerings at BV4 is startup and innovation scouting. We usually provide this service to large corporations to help them detect trends early, either to invest in young promising companies or to start a similar project of their own. Most corporates look at startups because they operate in a different set-up. The lean and young companies usually work under the lower constraints than large corporations, allowing founders to be more creative.
The first step is defining the goal of our scouting mandate and how the scouting will be helpful to the corporates. Most likely, three situations can arise. The most common is conducting a market intelligence report to know the upcoming trends and how our client can position itself. Corporations sometimes invest in promising startups; in this case, the scouting would help determine which ones are the most likely to disrupt the market. Finally, they could also act as an acquirer and engage in an M&A transaction to acquire the technology without engaging in uncertain R&D costs.
Once the outcome is defined, the most important part is defining the scope. The search starts with brainstorming around industry trends and preparing a list of specific keywords and topics relevant to the future. The technology’s maturity should also be defined according to the client’s final goal; are we looking for a ready-to-market tech or a startup that might disrupt the market in ten years? Finally, a geographical limitation could be suitable according to the difference in regulation or corporate strategy. The most defined the target is the easier it is to find what startups and trends.
Now that we know what we need to investigate, it’s time to roll up the sleeves and dig. The two most common resources to look for innovation are private databases and industry-specific news. The biggest private database for innovation and early-stage startups are Pitchbook, Crunchbase, Dealroom, CB Insights, and Tracxn. These platforms usually charge a yearly fee in the tens of thousands per year and aim to provide information about public and private companies and venture transactions. Using these platforms speed up the process, and cover a large part of the market.
The second layer is a bit more time-consuming. Various public databases (such as startup.ch in Switzerland) can give a good overview of the market. The next step would be to find the best industry or tech website (such as TechCrunch or Swisscom’s fintech map).
Once we identify the first players in the market, we perform a competitive analysis on each of them, find news companies, and repeat the process to cover the targeted market as much as possible and build an appropriate database.
To go even more in-depth, the scouting exercise should also include in-person scouting. We advise a strong presence when events and startups pitch competitions resume. Those gatherings are an excellent opportunity to meet founders, get insight into which innovations are being developed, and know which startups are looking for funds.
The last part of the scouting exercise is to determine which of the database players is relevant and make sense of all the information. We usually classify using our proprietary evaluation method. The BV4 rating focuses mainly on four dimensions, the team, the product, the market, and the business model. We weight the categories according to the startup’s development stage and derive a valuation from it. However, a corporation could focus more on the product’s dimension if it wants to acquire the technology or the market potential and the team in case of investment. Each parameter should be divided into further categories. For the team, we look at the experience, complementarity, advisors, and passion of the founding team. We investigate the level of technology, scalability, development stage, and the customer-need, on the product side. When evaluating the market, we try to estimate the current market size, potential growth, and competitors on the market. Finally, we look at the business model to know if the startup has a good roadmap, partnerships, and what would be its distribution channels. We previously wrote about it on our blog.
While it might seem like a long and tedious process, innovation scouting is an essential part of corporate growth. The first significant milestone is to set up a process and stick to it continuously. Once you complete the first version of the scouting, you will probably have signed up to a few newsletters and understood which trends matter to your business. Going further, the process and the workload will be lighter as you will already have a decent market development understanding.
We would love to hear from your own scouting experience and the challenges you encountered, feel free to reach me at firstname.lastname@example.org.