We’ve often observed large, unjustified funding rounds taking place all over the startup world. Oftentimes, this is, essentially, the equivalent of “free money”. Startups are raising funds at insanely high valuations. But, are there any realistic prospects of success and profitability? Our experience says, not as often as you might think. That’s why we need the MVIF.
Inexperienced founders will often overspend and build new departments and infrastructure, in hope they’ll be able to meet the expectation set by the board of directors and investors. And, we’ve seen them spiraling to their own demise, one too many times, already. We think this is a dangerous way to work with funding. Conversely, we may have come up with a better solution; at least, looking at it from a pre-seed or seed investment viewpoint. And that’s the Minimum Viable Investment Framework (MVIF).
What is the MVIF?
The Minimum Viable Investment Framework (MVIF) is a framework that defines what size would be sufficient funding, each step of the way, for a newly found startup business. But, to understand how it works, we should first establish how startups work and what types of milestones should be set to get them on the right track, on the way to growth and scalability.
How startups work
Most startups, today, tend to implement the Lean Startup methodology to drive things forward. This methodology leverages an experimentation loop, called the Build-Measure-Learn model, to validate or invalidate the hypotheses made in their initial drafts of their business model. Here, we need to pose a question: How does one forecast the funding required for all that experimentation, coming up with a ballpark figure, at least? In short, they can’t; experiments fail and need to be reformed and repeated, all the time. And, therein lies the problem.
Being serious about an investment, the investor must understand they will need more funds than they think, especially if the venture progresses well. They need to be prepared to fund all the efforts that will validate the business model and bring it to a viable status. If the runway is any less, they’ll just be throwing money out the window.
Introducing the MVIF
Now, the Minimum Viable Investment Framework (MVIF) doesn’t mean we should start any venture with an arbitrarily minimum fund — also known as “a ticket” — to succeed. But, we need to keep in mind that our new founders are absolutely inexperienced in handling financials for capital efficiency; they need our help. And, we need to make sure that our investment remains viable throughout the endeavor. That’s why the deal revolves around the idea that we shall invest exactly as much as necessary, in tangible funds. Not a single dollar less — or more, for that matter.
The MVIF involves some strategic investment decisions. To elaborate, we need to have set our most fundamental milestones on paper. Based on said milestones, we need to come up with a figure that represents the effort required to achieve them. This figure will be the minimum amount required in funds; and it will be open-ended.
Our typical milestones
Starting out, it’s hard to produce clear milestones and goals, before one starts understanding their market. But, there are two distinct milestones that make sense, no matter what:
- Launching a Minimum Viable Product (MVP)
- Achieving operational success, in terms of a positive cash flow
That way, we keep it simple and as precise as possible, from day one.
Our typical requirements
- Product: Before we start working with startups, they should have an early prototype or an existing product for which there is a well-documented decision for a pivot.
- Target market: We generally focus on the specific major market area that is the US — or a broader, international market, depending on the type of venture.
- Team: We prefer startups that balance their strategic decision-making, by employing at least one business-savvy and one technology-savvy partner.
How does the MVIF help?
On a day-to-day basis, the MVIF actually helps in a few different ways; in more ways that you might think. For example:
- With “limited” — or, rather, not unlimited — funding, a team needs to come together and devise ways to cut through the noise. This helps welcome change in every aspect of the business.
- In lieu of unlimited funding — or runway — the founders, and the entire team, will be forced to think creatively in problem solving. This will make them more resilient, more authentic and decisive and more collaborative. And that’s putting some skin in the game.
- No business plan survives without contact with the customer. The team needs to make prudent use of their budget to tweak and finetune their business plan, by talking to customers; not by aimlessly throwing money to online ads.
- Tackling financials will be hard, but the founders will gain the experience they need to develop a mindset of capital efficiency.
More on these, later. First, let’s try to understand the basic types of investment strategies available and how they work.
What is an investment strategy?
In general, a strategy is a way of thinking things through. Talking about investments, a strategy helps shape one’s plan and series of actions, in resolving one or more problems. For example, how to reach and understand their market or revenue streams.
There are several different investment strategies to choose from, such as (alphabetically):
- Active investing, capitalizing on market opportunities
- Buy-and-hold investing, for investments that will probably perform well over a few years
- Dollar-cost averaging, consistently buying shares based on their cost
- Growth investing, for companies that show promising growth
- Income — or defensive — investing, based on producing a steady stream of income
- Index investing, allowing for a single-vehicle diversification of the venture portfolio
- Social impact investing — or SRI — for opportunities that will also produce a positive change for the society
- Value — or shares — investing, using generally undervalued opportunities
Of course, there are more ways to invest. And all these different methods can also vary in intensity, from a conservative level to an absolutely aggressive level; often, depending on how high or low-risk the opportunity is.
Now, while no one, specific strategy, will provide all we need to go on, we do have some really specific criteria for our investments. That’s why our investments revolve around:
- Early stage, B2B software startups (SaaS)
- The product should come with a strong element of automation, at all levels, to optimize customer acquisition costs and nicely balance our price points
- All candidates should aim for an inherently inbound business model, primarily targeting the North American market
How investment strategies work
Every startup that raises a funding round should at least understand the basics of how investment strategies work. Here are a few common considerations:
High-risk vs Low-risk investment
Risk and reward typically go hand in hand, when it comes to investments. The higher the risk, the better the rewards. If a startup goes public, selling a few stocks, this is usually a high-risk investment, for an investor to make. But, it will likely yield better returns, in the end.
Short-term vs Long-term investment goals
The market — any market — features a certain degree of volatility. Short-term goals, in any case, make more sense with lower risk investments, inasmuch as they don’t allow for enough reaction time to changes in the market. Long-term goals, on the other hand, make more sense with higher-risk investments, since they can usually withstand the volatility of the market.
Outsourcing vs DIY management
Managing an investment portfolio is, by no means, an easy task. Oftentimes, investors will use an investing service (software or not) to handle their portfolios. This works better for passive investments, though. We like a more active, DIY approach. We handle our investments ourselves, and we like to do it actively, helping each startup out, with tangible assets.
Long term investment strategy tactics that have proven fruitful
Developing a financial plan
Funds need to be handled in balance. A financial plan is a requirement for any startup that needs to bring results based on the MVIF. The same is true for an investor, as well. The investor should be direct and truthful with regards to what they need to achieve in each stage of the startup investment. And, so should the co-founders of said startup.
Starting investing early in the life of a startup
For an investor, the longer they have some money invested in a startup business, the more likely it is for them to receive satisfactory returns from its growth. That’s because of the compound effects related to investment capital. That said, the sooner in the startup’s life the investor puts in money, the better.
Avoiding timing the market in the short term
As with short-term investment goals, making short term decisions about getting out of a market, before getting back into it for better results, is probably not a good idea. As discussed, the market is a volatile place. Fluctuations are constantly happening. But, if one should look for a pattern, the most obvious one is that a good performance period, more often than not, comes after a bad performance period. An investor will typically avoid missing opportunities by trying to time the market. And so should a startup founder.
Investing in what you know
Investors will usually invest in whatever field they feel sufficiently knowledgeable. Other than that, they’d have to come up against some really great opportunity they couldn’t pass up. But, still, it happens. The best way to ensure a startup investment gets the best chance of success is to make sure the investor(s) are familiar with the field and specific industry the startup is trying to reach. That’s good advice on both sides of the table.
Setting up a cash-flow
Portfolio diversification is actually a good thing. Founders are often worried that their know-how might fall into competitive hands. That’s not really true. Investors are always consciously diversifying their portfolio enough to avoid such problems. But, there’s also a good side to that tactic. They’re investing money in as many different endeavors as possible, to reduce their own risk of a catastrophic failure. But, come to think of it, doesn’t this also mean that if a successful venture hits the ranks, it buys runway extensions for all the other ventures in the portfolio? We think it does.
Setting-and-forgetting
Not all investments are active. Some startups have already reached the point where they don’t need the extra help; just some capital. Then again, they might just have all the hands they need to get things done, and they don’t really need the distraction of a team expansion. That’s all fair and understandable. Investors may choose to invest, all the same. Especially if they are public companies and their stock seems to retain a steadily increasing value over time. But, getting something out of it may take years. That’s a set-and-forget type of investment that will eventually turn out to be advantageous for the entire portfolio, if fed back into the loop.
Using bonds — or fixed interest investment
Bonds are a long-term investment, if done right. But, they do pay off annually, depending on the terms of each bond. Investors use bonds all the time, to safeguard part of their liquid assets, providing additional financial stability to their portfolios.
Using dividend-paying stocks
Any investment that incorporates dividend-paying stocks, functions complementary to existing liquid assets for an investor — say, bonds. This gives them the leeway they need to keep every portfolio company running, even further extending their runway.
Diversifying the portfolio
As discussed, portfolio diversification is a risk-mitigation strategy. Especially long term investments, which tend to smooth out any bumps on the road, by means of better control over fluctuations in the market. Diversification in and of itself is also a safety valve of sorts. Avoiding having all single-trade specialized portfolio companies, having a few different trades makes up for any ups and downs on any one specific industry — or field. And that’s good both for investors and startups that are a part of the wider ecosystem.
Implementing the MVIF
Now that we know what an investment strategy is, how some of them are used and how they can yield better results for a venture portfolio company, such as a newly found startup business, we may better understand how the MVIF makes for a better solution in terms of efficient funding and capital efficiency.
Early stage, pre-seed or Seed equity financing with a low capital loss ratio
Initial funding
We provide our startups with a team of experts and we start experimenting towards product-market fit. We don’t conduct any growth marketing activities till we justify our hypotheses. And so, our initial capital infusion is limited to what’s needed; it focuses only on covering the basic financial needs for our newly found startups, such as hiring their first few employees.
Follow-up funding
Within the duration of our long-term program, we provide our startups with additional financial support. One that is aligned to the current and the targeted business development stage. For this reason, we constantly evaluate basic KPIs and metrics based on our methodology. That’s how we balance short-term financial requirements; the prerequisites to a transition into the next business stage.
Total funding
There is no fixed amount of capital that each startup will receive, in total. Early-stage funding varies, according to priced equity rounds.
Risk mitigation
The Minimum Viable Investment Framework (MVIF) helps both investment firms and startup founders avoid overspending without any real or substantial returns. It sets the frame for bringing the “right action, right time” principle from the Lean Startup methodology, into early stage investments. While risk mitigation is a job for both the investors and the founders of a startup business, it takes some knowledgeability and experience. As such, we feel the need to give our best helping hand in reducing the risk of failure, leading by example.
Ensuring focus and commitment
As mentioned, the absence of unlimited funds is actually a good thing. Startup founders will have to exercise creativity and hone their problem solving skills to overcome obstacles. These obstacles are what will help them become resilient and more able to resolve even harder problems, as they go through each different stage of growth and evolution, ensuring they keep their focus and commitment to the venture. Otherwise, they will remain inexperienced and won’t be able to be creative about any real problem. They’ll just need to keep throwing money on every hurdle, to try and overcome it; oftentimes, in vain.
Don’t get us wrong, there is nothing wrong with sufficient funding. Besides, that’s what we’re trying to achieve with the MVIF; strike a balance. That said, excess funding — even more than under-funding — is problematic. More times that we’d like to admit, we’ve seen excessively funded startups spiral out of control, spending much more than they can handle, just to keep up with quarterly goals. In our experience, that’s not the way to go; that’s a recipe for disaster. And, given that there is nothing left to liquidate in the end, said excessive funds were just free money everybody used to get on little more than a joyride.
Optimizing goal-setting
With a good financial plan and knowing that the available funds are not infinite — or insanely large — the founders have no choice but to put in the time needed to optimize their goals and actions. It’s the only way they can be sufficiently confident that they’ll be able to reach them.
Keeping things realistic with a down-to-earth approach is much more useful — at least during the first stages, say, up to a Series A investment — in terms of capital efficiency and proper financial management. Startup founders will be far more equipped to handle more complex situations, when the time comes.
Extending the runway
Let’s be realistic. A startup of 5 people won’t immediately be needing the $400K or whatever fund of that magnitude their investor intends to put in. They would burn through it like a 10-year-old in a mall; not from greed, but from lack of experience. And while that money was to last them two years or more (the expected runway), its average lifetime would be a few months (the actual runway). Hopefully, one can see the problem here.
On the contrary, if the flow of investment money were to be framed over a very specific set of timeboxed milestones, things would probably be quite different. The two-year runway would still be available — sometimes, we’ve seen teams exceed our expectations in the spending economy — for them to use efficiently, to bring their efforts to fruition; achieving one milestone after another, even when the direction needed to occasionally change. After all, the more one learns about their customers, the more they’re able to hone into their pains and create real, useful and targeted solutions for them; thus, harnessing the buying power of their market segments.
TL;DR
The Minimum Viable Investment Framework (MVIF) is a mindset. We’ve devised it through observation and experience; admittedly, with a healthy amount of experimentation. It’s purpose is to reduce the risk of failure for both the investor and the startup founders, and provide them with more opportunities to grow and thrive. That is, by extending their available runway, allowing them to fail and learn from their findings fast, and helping them learn how to pick up the ball and start running again, to fulfill their dreams.