An Inside Look at a VC’s Priorities when Evaluating Potential Investments
The relationship between investors and their portfolio companies often is described as a marriage. It is a long-term commitment by the investor and the company to work together, for better or worse and hopefully for richer and not poorer.
Thus, it is critical that both parties understand the expectations of the other before committing to an investment. Below are a few priorities that Gore Range Capital considers when making investments, summarized from a February 2021 conversation between Ethan Rigel, Founding and Managing Partner of Gore Range Capital, and startup founders at Founder's Lunch, held by TechFW.
Fit with Investment Focus
Every investment fund has an investment thesis and strategy. This thesis leverages the expertise of the VC’s investment team and is based on where the VC sees opportunities in the market (e.g., tech, healthcare, consumer), what kinds of companies the VCs believe will be most successful within those opportunities (e.g., early stage vs growth stage), and how the VC likes to work (e.g., does it lead or co-lead? does it require board seats? what is its typical check size?). This is also what the VC’s own investors are expecting them to invest in. Understanding a particular VC’s investment characteristics is crucial for founders as it can help founders narrow their focus when seeking funders.
Ethan: “At Gore Range, we are focused on early-stage investments and we take a broad definition within healthcare through the lens of skin health. We look at anything that diagnoses, prevents, treats, regenerates, or enhances the skin, as well as at enabling IT and devices that enable patient care. We like to find companies where we can leverage our skin health networks and expertise that we've built over our careers to help companies achieve milestones faster and more efficiently.”
A great way to learn about a VC firm’s investment interests is to look at blog posts and white papers put out by the firm as well as any interviews done by its team. Gore Range released a white paper at the beginning of the year looking at skin health opportunities in 2021, which should give founders a good indication of its interests in the space.
Team, Team and Team
The most important consideration for Gore Range Capital as an early-stage investor is the management team. There will be challenges and many ups and downs as a company grows and develops. VCs need founders who are complete zealots for their ideas, who are fully committed to their project.
Management must also have the self-awareness to know what they are good at, what they are not good at, and how they need to build their team. The CEO or co-founder doesn’t need to have every skill the company requires -- teams get built over time -- but across the team, VCs such as Gore Range want to see that people are experienced in the space and/or have a history of success.
Founders should ask also themselves if what they want to be is actually the CEO. Or do they just like the title of CEO? A lot of founders really want to be head of product or head of technology and focus on development work to help the company grow. Founders can bring in other people to do the other management pieces and back-office and sales and marketing; they will have a better time doing this and it will be easier to attract investors when the right skillsets are in the right positions.
Lastly, the VC and the management need to be able to work together. For VCs that lead and take board seats, as Gore Range does, they are working closely with the management to guide the company. There needs to be a strong rapport between the investor and the management, and trust and mutual respect between the parties. At the end of the day, the management still runs the company even if the investors have a bigger equity stake.
Use of Proceeds and Development Plans
Ethan: “A check-the-box that is an absolute is making sure that you are organized, that you are legally formed as a company, that you have financials in place, that you have the ability to take money in and actually look after it and be able to tell your investors where it's going.”
This may seem simplistic, but deals break down when entrepreneurs are not able to be specific about how they're going to use the money and what milestones they will achieve as a result. While understanding the plans change as circumstances do, investors such as Gore Range Capital need to have confidence that there is a plan in place and leadership has the ability to execute either on the plan or make changes as things progress.
While not all VCs do this, Gore Range reserves a portion of its investments for follow-on in subsequent fundraising rounds. When Gore Range makes an investment, it considers the total investment the company will need to achieve liquidity and factors that into its decision-making. The initial check is only one piece of the total commitment, so it is critical that Gore Range understands what milestones the company can achieve with this investment, and what future milestones and inflection points need to look like for the company to successfully raise future financing.
Product and Market Fit
While the science is a key factor in Gore Range’s investment decision-making (if the science is dubious then it’s an automatic pass), equally important is the commercialization strategy. Investors need to believe that there is a market for what someone is developing and there is a willingness to pay for the innovation. Companies can create a great product, but if no one is going to pay for it, then it is not an investable opportunity for a VC like Gore Range’s.
In healthcare, this is particularly nuanced. The person that orders the product, consumes the product and pays for the product can be two to three different people, depending on if insurance is involved. All three of those people need to have a reason for the product to be successful.
This is where a specialized VC can be helpful. Gore Range’s experience in skin health helps the investment team understand the dynamics within the healthcare ecosystem and in turn, it can help portfolio companies think through market positioning and the right commercialization strategy. Gore Range also collaborates with a strong network of advisors and experts who bring in another dimension of support to portfolio companies. Founders should consider how their investors can be helpful beyond just their capital; this additional level of support can greatly accelerate a company’s progress.