Some investors believe the rise of data analytics will take over the decision making process for funding startups and that most venture capitalists will be out of a job in the next five years.
Data analytics works well in some sectors such as consumer product goods because the business models are clearly defined and analytics can make meaningful predictions. In tech-enabled models, it’s not quite as clear.
Data is used to inform the investor– it does not decide for the investor. It’s useful to have additional analytics around a potential investment but it’s unlikely that data analytics will completely take over.
TEN has its own data analytics which it has developed over the last ten years for identifying fundable companies. On the TEN Capital Network website you can see the details of TEN Capital’s Predictors of Funding.
With ten years of funding history, we track the results of the investments and understand why most of them succeed, however, there are exceptions that did well even though they didn’t meet this criteria.
The criteria we found for successful startup investing are:
- There are two or more industry-experienced C-level leaders
- The company has a strong competitive advantage.
- The company is solving a hard problem.
In every investment, the team comes first.
A competitive advantage is more than just a fistful of patents. It’s an advantage that either increases the company’s revenue by 30% over that of the competition or decreases their cost by 30%.
A hard problem is a problem that customers will pay for it and it is non-trivial.
The key here is you need both. There are many universities solving hard problems but there’s no competitive advantage in the sense the market will pay a premium.
There are also “execution plays” where a company is out-executing the competition but without solving a hard problem, it won’t last long.
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies.