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Simon King is a fund manager within Octopus Ventures. He explains the team’s approach to investing in early-stage companies and how they spot potential winners.
There’s an old adage in venture capital investing.
“Invest in A-class teams with B-class ideas, and never the other way round.”
When Netflix was founded in the nineties, it wasn’t the streaming service we know today, but a mail rental DVD company. PayPal started life as Confinity, a company developing security software. Slack, used in offices across the world, was as a by-product of a failed video game.
You get the picture.
Few successful businesses end up doing exactly what they set out to. So when you invest in an early-stage business, you have to expect it won’t be selling exactly same thing by the time it finds success.
Things evolve. Challenges are faced. New opportunities arise.
As a venture capital team, you have to be open to that. You invest in fantastic management teams and help steer them to success. It always comes back to the team. Ability to sell is critical – sell a product to potential customers, and sell a vision to employees and investors, the people who part with cash to help achieve that vision.
Having the vision
There are some straightforward market factors we need to see before investing in a business. A large addressable market is critical. Usually, this will be a market valued at more than £1 billion. The business also needs to be capable of growing rapidly in a relatively short timeframe and have a good chance of growing new markets or pushing out incumbents to meet the criteria for investment.
We’ll also look for a competitive advantage, usually in the form of significant intellectual property.
Beyond this, Octopus Ventures tries to see opportunities that have been overlooked. A fundamental part of this is valuing diverse backgrounds in the investment team. You need diversity of opinion when assessing start-ups. A team with a narrow outlook simply cannot assess opportunities as well. Take Elvie, for example, a company Octopus invested in which has great potential. It designs and manufactures health technology for women, such as a silent wearable breast pump. Many investors couldn’t see the opportunity, seeing the area as taboo.
In fact, Elvie had a fantastic opportunity to tap into a huge underserved market that had been overlooked by big pharma.
Hiring from diverse backgrounds and creating a culture of open-mindedness gives you a better chance of spotting these kinds of opportunities.
Venture teams then need to be able to sell portfolio businesses which may have grown to be valued in the hundreds of millions, if not billions in value. Octopus Ventures’ network and reputation within the acquisitions space enables them to secure the best exits for businesses, founders and ultimately for investors. Although it is important to remember that venture investing is high risk and not all companies will be successful.
Octopus Ventures review thousands of businesses a year. As you’d expect, there’s a steep and sharp filter. The team will meet with a few hundred of these businesses and invest in just 20 to 30 of them.
Over the past decade, Octopus Ventures has become a well-recognised brand among founders and entrepreneurs. When start-ups are looking for investment, the team often make the short-list of who they want to meet with. The team also find deals from a network of angel investors, seed firms, academics, and industry contacts.
This results in a strong pipeline of investment opportunities, which is an integral part of successful venture investing.
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