Beyond Team and TAM: Quantifying Venture Investing

TAM

By Mike Ryan, BPN Co-Founder and CEO
The best venture investors are exceptional at spotting breakout opportunities, identifying great founders, and understanding how one product or service may transform an industry or dominate a market. All year long, they do a professional job sourcing deal flow, building relationships, managing people and driving process, but their success (or failure) is typically defined by a handful of major decisions they make during the life of each fund.

Implicitly or otherwise, these major decisions often relate to one simple question: Why is one company valued at 4x, where as another - in the same sector with the same business model - is valued at 24x? Let’s be honest right from the start: typical “valuation” work based on a set of “comparables” does nothing to answer this key question, which is why most venture investors don’t think valuation is all that important, despite the obvious truth that their returns are precisely defined by the difference between exit valuation and their entry price (see BLOG: Is there a Better Way to Predict Future Exit Multiples?) 

We know that venture time horizons are long, growth rates are high, and uncertainty abounds, which is why many venture investors take company projections with a grain of salt, spend less time building detailed cash flow models, and instead focus their efforts on evaluating TEAM, TAM, TRACTION and DIFFERENTIATION. Moreover, serious thinking about entry price and potential exit scenarios is often done after the investment team leader has pretty much decided they want to own a piece of the company, and valuation is used primarily for negotiating terms rather than decision making. 

Nonetheless, while we believe human insight is essential to assess the long term future of early stage, high growth companies, we also believe that quantifying the stories you are being asked to believe is just as critical. Unfortunately, the traditional method of reviewing pitch decks, meeting management teams, summarizing pros and cons, and loosely calculating the upside/downside using a set of comparables in a spreadsheet is not sufficient to support your biggest decisions. Bulletpoint.network enables you to quantify these stories and clearly see your odds of various outcomes - all based on the same logic and insight that drives your process today, amplified with numbers you can confidently rely on.

Our software-enabled service uses graph database architecture and parallel computing to amplify the knowledge from your slides, memos, notes, and spreadsheets to produce probabilistic scenarios for growth, profitability and scale potential over various horizons. We enable you to see how cash flows may unfold as milestones are met, visualize exit scenarios before you invest, and monitor progress during the life of your investment. None of this is divorced from your views; in fact our models are built around your key judgments. We leverage your story-driven insights into quantified scenarios that drive confident decisions. All of our research and analysis is available to you and your team via  our secure password protected platform or frequent email alerts directly to your inbox.

TEAM, TAM, TRACTION and DIFFERENTIATION will always remain at the center of venture investment decision making, as well they should. But how much would it be worth to your returns if you avoided a handful of the absolute zero-type losers, or gained the confidence to pay up or scale up just one or two more runaway winners ? Could seeing the odds clearly, mapping evidence to the drivers of revenue growth, eventual profitability, and scale potential help you to have more confidence ? Could keeping your judgments continually updated with new research and insight improve the quality of your decisions? 

There are two great ways for venture investors to make money: 1) spot a powerful trend, find a good CEO to back and pull the trigger on an investment with obvious upside (but don’t overpay!) or 2) express a contrarian view about the future growth, profitability and scale of a business  (and be right!)  Both require the marriage of words and numbers, which we call Quantifying Stories in Scenarios. It's never been more important, and its never been easier than today with Bulletpoint.network.