TL;DR: The venture capital investment thesis example from OpenOcean
They start off their thesis with the basics, business model and metrics.
Some of my favorite quotes include:
- We always prefer painkillers and addictive painkillers in particular
- Ease of adoption and burning need boil down to something we call “time to love”
- For software to reach adoption it has to smoothly fit in, meaning that it must be compatible with the processes and practices of the organisation
Basically, these guys make “investments in Delicious data-intensive software.”
If you want to change the world, growing a large customer base is great, but if you manage to build a thriving user community — then you’re onto something truly astonishing
They are not super explicit about the types of companies they invest in, but they like companies that do things “like smart aggregation and use of data, which could, for example, mean that you make sense of huge amounts of data with intelligent processing and machine learning and thereby solve critical business problems.”
- We look for software startups all over Europe
- We focus on Series A financing rounds (Because an A round can mean different things depending on location and industry we’re somewhat flexible about the stage)
- The initial investment would typically be between 2–4 million euros
- Proof of good initial traction and growth
I’ve helped some VCs with their investment thesis and often find that their stated investment thesis isn’t really where the magic happens, it’s more in portfolio construction. I think this thesis could be a little more lucid, but it’s certainly better than some.
OpenOcean is a European early-stage venture capital firm. The company engages in helping entrepreneurs build global software companies.
OpenOcean typically lead or co-lead €5M funding rounds. The investing team has extensive technical, product, and operational experience and each partner works with a maximum of 8 young companies.
They have raised two funds totaling €140M.
Some of their deal involves the below from CrunchBase.
“So you invest in software. What do you look for?” That’s something we get often, in particular when talking to investors. Fortunately, it’s a question we love elaborating on.
As former founders with a background deep in technology, we are passionate about software. It’s the reason why OpenOcean exists. Our mission is to help smart entrepreneurs spread software to the broadest use possible. Ideally put it in the hands of millions.
Our investment thesis hasn’t changed dramatically during the past few years. We’ve stayed true to our core mission, but have evolved our thesis to encompass the movements we see forthcoming and have further developed our thinking around aspects we’ve always intuitively looked for.
OpenOcean focuses on investments in Delicious Software. Talking about software in terms of a culinary experience always brings a smile to people’s faces and it might at first glance seem far fetched. It’s, however, the perfect allegory and there are a number of key characteristics that in our view make software delicious.
For a software to reach the broadest usage it has to be extremely easy to adopt. It helps if there’s a burning need for the users to solve something. If we have to choose between vitamins and painkillers, we always prefer painkillers, and addictive painkillers in particular.
Ease of adoption and burning need boil down to something we call “time to love”. Ideally, the time to love is very short, preferably just a matter of minutes. That’s when you experience the wow-effect and start talking to your friends and colleagues about what you’ve just tasted.
Our focus is on business software and the days are past when new software was top-down pushed into organisations by IT departments. For software to reach adoption it has to smoothly fit in, meaning that it must be compatible with the processes and practices of the organisation. Obviously, any new software solution needs to provide a clear return on investment as well.
It’s also good to remember that for organisations to really fall in love with delicious software, and gradually start paying for it, it’s not just about how the food tastes and what it contains, but how the whole restaurant works.
Communities and data intensive solutions
If you want to change the world, growing a large customer base is great, but if you manage to build a thriving user community — then you’re onto something truly astonishing. It can become a force that delivers a unique competitive advantage, something not even the largest players or the best funded startups can match.
We also like smart aggregation and use of data, which could for example mean that you make sense of huge amounts of data with intelligent processing and machine learning and thereby solve critical business problems, like our portfolio company Nosto that helps e-commerce merchants sell more by learning from how tens of millions of users behave.
We very much agree with the now old saying “Data is the new oil” and we search for opportunities that challenge the boundaries of how this oil can be refined. When you combine community and innovative aggregation of data you can get to crowdsourcing of strong insight. Some of the most compelling value propositions in the software industry today are built on this approach.
What makes a software business scalable? Well, clearly it helps if people love the software and tell their friends about it. However, there aren’t any exact rules for scaling, as no case is identical with another.
In order to understand a software company’s true potential for massive success, we typically review and analyze scalability from a number of different perspectives. In our mindset the actual revenue scaling is not the starting point at all, but more an end result. The revenue side of the business is merely the outcome of the approach chosen, the process implemented, and the actions are taken. Some of the scalability perspectives we look at are listed below:
- Awareness: How do people become aware of the product and the offering?
- Initial Traction: How is the software being adopted today? Are there metrics that prove Ease of Adoption, Burning Need, and Short Time to Love?
- Engagement: How do you measure active usage and the delivery of continuous value to users?
- Community: Do users contribute to you or to others in order to improve the ecosystem around you? Is there viral spreading that can be measured?
- Product offering: How do you define different product tiers with clear value differentiation between each tier?
- Conversion process — Marketing: How are users educated on the product tiers, and what motivates them to move? How can this system best be created, measured and optimised?
- Conversion process — Sales: What segments do you have? What sales methods work best for which segments, and which parts of the funnel?
- Partnership strategy: Who should you work with and in what way?
European Series A venture capital
We look for software startups all over Europe and we focus on Series A financing rounds. Because an A round can mean different things depending on location and industry we’re somewhat flexible about the stage, but our initial investment would typically be between 2–4 million euros. Regardless of what the round is being called, certain things need to be in place.
There needs to be a great software solution out there with proof of good initial traction and growth. Ideally, people are already willing to pay something for the software. There has to be a believable business plan with unit economics that make sense.
A large and exciting market is also a must. In a best case scenario there are low barriers to rapidly grow in the market, and then while doing so building a strong competitive position significantly preventing others from competing on equal terms.
The startup needs to have a strategy that defines how adoption can be maximized and how revenue is best driven from the user base.
Finally, there needs to be a strong domain expert team and that’s such an important aspect that it deserves a chapter of its own.
Bold founders with a global outlook
In many cases where the product, traction, and market potential have been great, we’ve still ended up agreeing with the entrepreneurs not to invest. How come?
The thing is that in early-stage venture capital investments you invest first and foremost in founders and the team.
To strive for something really big requires an incredible amount of self-confidence, passion, belief, stubbornness, and ambition. There are so many uncertainties to overcome along the way and no-one can rationally beforehand be certain that everything will work out to the best.
It’s no joke to say that many of the most successful entrepreneurs are slightly “crazy”. This craziness is the trait that makes them disregard several of the risks that otherwise might drive them sleepless on the long journey to build a global winning company.
A founder who’s aiming high has to put aside parts of her rational analysis and simply believe — while relying on and drawing strength from deep domain expertise. We’d like to find and attract precisely those bold and courageous founders.
There’s no point in investing in software without a solid thesis. As circumstances change and new technologies emerge you might have to evolve and sharpen your thesis. Fortunately, we’ve been able to rely upon and hold on to much of our original core thinking — we invest in extraordinary people building delicious and data-intensive software.
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