Investing and Vacation Planning

Leveraging key criteria to build a deal screening process

Happy Thursday, 👋

We were recently asked about the volume of investment ideas early-stage investors screen in a short timeframe. With almost 100 ideas a month, we can't perform detailed diligence on each company. Instead, we follow a process similar to planning a vacation.

Vacation Planning and Investing

Vacation planning begins by asking friends or family about interesting locations or compiling a list of places based on past conversations or experiences. With tens of thousands of potential destinations, it's impossible to review each one in detail. Instead, we narrow down our focus areas based on external data points, resulting in a handful of destinations for further detailed review.

Early-stage venture investing follows a similar process. We form general concepts from conversations and ongoing research, then build theories about where industries might be headed. We look for companies that are the missing puzzle pieces capable of building this potential future. Once we have a handful of companies, we use a few high-level criteria to perform an initial screen.

High-Level Screening

Once a vacation spot is chosen, finding the right hotel follows a similar path. We do not review every hotel in a city but instead develop broad criteria such as class, location, or amenities. Our investment search follows a similar pattern. Once we find companies that might fit our broad thesis, we narrow down the ideas using a few key criteria:

💲 Valuation: Is the company's valuation reasonable? Revenue multiples are common metrics for early-stage valuations. A word of caution, always check how the revenue number is calculated. We focus on the trailing 12 months. Sometimes, revenue is presented as an annualization of just the last month, so always ask how a company calculates its annual revenue number.

👨‍💼👩‍💼 Circle of Influence: Is the board or group of advisors able to help problem solve or advise the company, or are they merely window dressing? For example, Theranos had a board comprised mostly of military or government backgrounds, which looked impressive but raised questions about the lack of physicians or scientists for a medical device company. Impressive names on a board do not guarantee success.

🔮 Future Fundability: Can the company or idea scale with a large enough market to support future financing rounds? Great companies can struggle to raise capital if the market for their product or service is limited. Additionally, a founder unwilling to listen to advisors or bring in more experienced executives to scale the business can hinder growth.

The Missing Puzzle Piece

Our goal is to find companies that are the missing puzzle piece capable of changing the inflection point of an industry. As generalists, we look across industries with a high level perspective to identify where changes might be occurring.

A few more common examples of the process include the foundation of artificial intelligence, which started in the 1950s, but it took a combination of improved algorithms and computer hardware to advance the industry. NVIDIA’s chips were one of the missing puzzle pieces which created an inflection point that allowed AI to progress at a faster rate.

Similarly, personal computers were initially hobbies. Steve Jobs found the missing puzzle piece when he toured Xerox’s Palo Alto Research Facility in 1979 and spotted the Alto computer. He realized the graphical interface was the missing puzzle piece that would make computers easier to use and open them up to more people.

Additional Thoughts

Planning a vacation involves building an idea of where you might like to travel and then looking for puzzle pieces such as hotels, flights, and restaurants. Venture investing is similar. We start with a general idea of where we believe an industry is heading and look for companies building the future of a sector. When choosing a hotel, you start with general criteria such as location, ranking, and key amenities. Narrowing down our investments follows a similar path as we use general criteria to quickly decide which companies warrant further research.

With the right screening process, we can sift through a large volume of potential investment ideas. Ongoing conversations with people across industries and pulling data from a variety of industry and academic journals help us formulate ideas of industry directions. Like planning a vacation, finding the right investment idea takes time, but the outcome can be very rewarding.

Wishing everyone a great weekend,

-The Caymont Ventures Team.