Learnings from (un)successful DDs: Stick to the fundamentals
| Published |
|---|
On average I see over 1,000 deals per year, DD in more significant detail 10-15, and invest in 2-4. This means there is quite a bit of time spent on deals that didn't make it. But, whether I invest or pass on deals, there is always learning. This post is part of a series on learnings from (un)successful DDs.
Invest with conviction based on fundamental analysis as opposed to market or investor hype
Today we completed DD on a deal in the proptech space. The company has a stellar team led by an experienced CEO and includes key people from industry leading pathfinders. The founder has experience in both the industry and technology plus comes from a family with connections to high profile angels. The result is a great product, early but promising traction, and a company that is unlikely to go bust because of the team and the investors around the table. It’s a hot company, really.
But we passed.
The main reason is in the fundamentals. The company is valued at >250x current ARR and >20x forward looking highly aggressive ARR. To justify growth, one has to see market depth, and in this case the market is rather small and opaque, so we could not achieve conviction. The valuation was apparently set by last round investors, following frothy times and seeking an uptick. It was basically artificial. What I suspect will happen is that the next institutional round will see a recapitalisation because no VC in the right mind will pay these type of prices. The current round investors will be squashed.
The market was insane in the last few years and now it’s coming to its senses.
Almost two-thirds of the Nasdaq’s 3,000 plus members have fallen by at least 25 per cent from their 52-week highs…. Almost 43 per cent have lost more than half their value, and nearly a fifth have tumbled over 75 per cent. See FT
Of the 76 companies in Bessemer’s Cloud Index, every single one is down. The average company is down 53% from its 52-week high
We pay a lot of attention to KPIs, including committed ARR, growth, churn, and cash efficiency. It’s a checklist, much like a pilot does before taking off the airplane. Otherwise it might crash and burn.