NXTGEN

WHAT IT MEANS TO SEE THE UNSEEN

Most decisions are made based upon a historical set of circumstances. On things we have seen. What happens when you See the Unseen.

Common wisdom speaks of a positive correlation between cause and effect; where a series of inputs deliver known anticipated outcomes. For example, business processes follow a set of identifiable and quantitatively measured inputs. With all things being equal, and after taking into account the high probability nature of certain assumptions, the outcome should result in an ROE equal to the expected returns.  

When it comes to investing, institutional capital plays well into this space. Capital allocators managing third party funds – like pension funds or endowments – have a requirement to provide for their members with the least amount of risk. Their biggest struggle is trying to manage the risk-return profile, and balance capital preservation with healthy returns. What if I told you de-risking starts with making the unseen seen.

We believe venture will continue to mature into a valuable asset class, with family offices increasingly wanting to increase their allocation. This helps in diversifying investments and increasing their returns profile. 

One of the things that becomes important for family offices is to be able to distinguish themselves by making direct equity investments. But not just any investments – investments that are often aligned to their family mission and investments that can yield some of the biggest outsized returns possible.

BUT WHAT DOES THAT LOOK LIKE? 

Below are some key traits that indicate when certain early stage companies have a large potential outsized return profile. For clarity purposes, we invest earlier than this. Our target, through our early investment strategy, is to see our investors take up opportunities in our portfolio for direct equity stakes in later rounds. Let’s dive in:

#1 The market gap 

The market gap is obviously very significant; not only with billions of dollars in unmet need, but billions of dollars in serviceable clients. Current serviceable market should exceed 1+ billion dollars, and the industry should have strong positive year-over-year growth. Anything less than this, and you really have to question whether venture investment is warranted, and whether there is a reasonable expectation of significant revenue gains.

 #2  A tangible solution

The problem being solved by the company is credible and its solution is tangible. And revenue numbers must prove it. Annual recurring revenue should exceed 2 million dollars, and management should expect to double and triple their revenue growth over the next few years. 

#3  Product leadership

Product leadership and management expertise should demonstrate that management has the potential to scale the business from 20 to 50 million and onward to 100 million dollars in annual revenue.

#4  People and Talent acquisition is strong

Founders, co-founders and the current management team are missionaries and evangelists. They convert customers, key stakeholders and employees to the mission. People and talent acquisition is strong.  

#5  Product roadmap and market strategy 

The business product roadmap and market acquisition strategy should further entrench its moat and fortify its market position. Whilst access to innovation becomes more widespread, barriers for competitors should be strengthened. 

These are some of the high-level benchmarks we measure when considering investments that have the best possible outsize return profiles. There are many other metrics and KPI’s to consider, but at a high level, these 5 traits are evident across all high potential growth assets.

Some of the other important aspects we consider when assessing opportunities are (1) management’s ability to clearly communicate its value proposition and (2) its ability to iterate and solve, with meaningful solutions, some of its biggest challenges. Their ability to lead, win people over and execute strategically are at the core of those that consistently win. Growing an early stage business is extremely hard and those that win have learnt a tremendous amount of resilience. They have garnered a knack of persevering through execution. When you find a founder that has demonstrated these abilities, has commercial clout to negotiate well and has the technology and core team to support its products – this is where you bat hard, and swing for the fences.

Discovering these opportunities can deliver exceptional results. This is where the investment alpha sits. Seeing the opportunity for growth starts with asking a series of questions and then imagining future possibilities. By following this process, we develop a framework of what we are looking for, so that when we see early signs of positive momentum – we can take them.