How we can improve the odds of finding unicorns

It was my first day at Version One when I realized that finding “VC-fundable” startups would not be easy.  Aileen Lee, founder of Cowboy Ventures, posted a brilliant analysis on why VCs have to look for billion dollar companies (“unicorns”) to deliver acceptable returns, and how rare it is to invest in one: “The odds are somewhere between catching a foul ball at an MLB game and being struck by lightning in one’s lifetime.”

However, despite these kinds of odds, I’ve learned there are several things we can do to improve our chances of finding the elusive unicorns:

1.  Data helps filter through the noise.

With nearly 30,000 startups on AngelList, there’s a lot to sort through. Nowadays, we can learn virtually everything about a company online, from its tagline to founder backgrounds, fundraising history, current investors, and social media traction. However, while data is ubiquitous and free for the most part, it is also fragmented, inconsistent, and seemingly disparate. This makes it laboriously difficult to identify rising stars and make comparisons within a specific vertical.

Fortunately, web apps like Mattermark, DataFox, and PitchBook wrangle, clean and organize the data so that we can focus on analyzing it. We can whittle down those 30,000 companies to a more manageable number by filtering for business models, regions, state, co-investors, Twitter mentions, Facebook likes, LinkedIn connections, iTunes downloads, unique website visitors, and/or other criteria that align with our investment thesis.

2.  Be thesis-driven.

We are often asked what industries we invest in, but it is more important to have theses on business models that serve as strong filters. At Version One, we have 6 investment themes (and more to come – stay tuned):

  • Vertically integrated commerce.  Controlling the entire supply chain brings unique product lines directly to the consumer at lower prices and better margins.
  • Vertical SaaS.  This approach helps capture the market more quickly with lower CAC and capital requirements.
  • Online education.  Mobile and social product experiences are making learning more affordable, efficient, engaging and effective.
  • Hardware renaissance.  Numerous innovations (e.g. Raspberry Pi, Arduino, etc.) are making it easier to develop hardware products.  We are interested in platforms that power this space.
  • Mobile marketplaces.  The ubiquity of mobile makes it quicker and cheaper to connect buyers and sellers.
  • B2B marketplaces.  There has been a lot of focus on B2C marketplaces, but there are still tremendous opportunities left in the B2B space.

3.  Manage your time wisely.

We challenge ourselves to think about tools that we can use to organize and manage our meetings, events, pipeline and readings.  To reduce redundancy in deal flow, for instance, we collaborate online as much as possible with web apps like RelateIQ.  To consume content quickly, I am a power Feedly user and Twitter discoverer.

4.  Be kind and generous.

When most of your time involves working with others, perhaps the most important thing you can do is build genuine relationships.  Because every meeting is a learning opportunity, I make the effort to thank others for their time by being generous with my own.  With entrepreneurs, I try to provide thoughtful feedback, always remembering that they are hardworking individuals with the courage to build a company.  With colleagues, I take note of their interests and share articles or startups with them.

Also, in a world dependent on introductions, I often thank those who make them on my behalf.  For example, in addition to writing the common email line, “Thanks for the intro to Cassidy, David (moving you to bcc)”, I follow up with the “Davids” after meeting the “Cassidys” with notes like “Hi, David.  Thank you for connecting me with Cassidy.  I learned about x, y, and z from her.”  This is a tangible display of appreciation that helps keep me in mind for future connections and deals.

Since writing my blog post on “Why VC is a perfect fit for me” on my first day, I have enjoyed every moment of this work.  I owe this to everyone who has contributed to my learning.  Thank you.  Now to get back to looking for unicorns…

  • http://about.me/bennypage Page

    Good post – thanks for sharing your approach Angela. With VC now becoming increasingly more about deal selection rather than deal sourcing, I’d be keen to learn more about Version One’s selection criteria for its investment themes. Look forward to future posts.

  • atkingyens

    Thanks! I think you nailed it right on, re: deal selection vs. sourcing. I’m definitely hoping to write more as well :)

    As for our selection criteria, we have written about them in past posts. For instance, our thesis on vertically integrated commerce is around a unique product line (http://techcrunch.com/2012/09/29/the-next-big-e-commerce-wave-vertically-integrated-commerce/) while for SaaS, we like the bottom-up vs. top-down approach (http://versiononeventures.com/selling-enterprise-sell-vs-sell-many/).

  • jamiemcdonald

    Great post. Curious if you have written algorithms that help in company discovery based on the metrics you are tracking. Feels like a simple algo that looks at traffic growth + social traction to identify interesting new companies might work.

  • http://jaydengvc.tumblr.com/ Jay Jay Deng

    When I started out angel investing, I made tons of bad investments because every angel and micro VC fund likes to think they will find a unicorn but that’s rarely the case. It always ends up being a fools errand.

    The key to success is to not look for unicorns at all but instead, approach seed funding as a short term play. I use to invest in a startup and wait years hoping for a exit which rarely came. So now I just resell my equity stakes to Series A investors and make a quicker, more profitable exit. I’ve been doing this for the past year now and haven’t lost a single penny since.

    The advantages are immense: I make a good return on my angel investment, Series A investors get more equity for a good price and the founders are not as diluted because of a cleaner cap table.

    Its when I stopped looking for unicorns that I started making money. This is what every angel and micro VC firm, like yours, should be doing especially given the favorable Series A landscape. If you look at the Crunchbase data, more startups are raising more Series A funding than ever before – this is why the short term strategy works.

  • bwertz

    This might be a good way to make money as an angel but doesn’t work for a fund. A $20m fund like Version One needs to return $60-80m to its investors to create appropriate returns doubling or even tripling a $500K investment between the seed and Series A round would not move the needle. But it certainly does as an angel.

  • http://jaydengvc.tumblr.com/ Jay Jay Deng

    That’s why you need to take a volume approach as well. In the past 18 months, I did 15 investments at an average of $400k, 5 investments I am still waiting on, the remaining 10, I resold my position to Series A investors at an average of 2 million getting a 3x return in the end. I am shocked I didn’t figure this out sooner.

    Next year I will be investing just as much as your fund and I expect even better results this time. So yes, it will move the needle a lot, you just have to play the numbers game.

  • http://www.lookman.co.uk/ Lookman

    I have a unicorn, but I cannot get it out of the box because the horn is too long. http://lookman.biz