Seed investing is far from an exact science. Because early-stage companies do not yet have a history of revenue and growth, investors must rely on observations and past experience to make judgments about the growth potential of the prospective company. This reliance on intuition and subjective information means there is all the more value in a systematic, institutional process that is respectful of the founder's time and designed to reach an informed decision quickly. In this blog post, we share insights into Space Capital’s four-step investment process for Seed stage investing:
- Alignment: Thesis and Value Driven
- Diligence: Intentional and Diverse
- Synthesis: Quantifiable and Comparable
- Decision: Unanimous
This concrete set of steps ensure that the pathway from introduction to investment is efficient, uniform, and value-driven
As the physical world becomes more and more connected, space-based technologies are being integrated into more and more businesses. For the companies who match our thesis, Space Capital’s overarching goal is to be a valuable partner, equipped with the experience, network, and tools to support growth across a diverse set of portfolio companies. We look for founders that see benefit in our expertise and there are clear pathways to support a company’s vision for growth, whether helping terrestrial companies build out their space strategy or helping space companies access terrestrial markets. Two specific examples include:
- Totum Labs: A pioneering team of communications engineers, the company determined that space was the ideal platform to deploy its DMSS technology to deliver next-gen IoT. The company saw tremendous value in our experience building, launching, operating, and monetizing space-based assets. This synergy has proven powerful as the company launches its first satellites in 2021.
- Mobius Labs: A leading computer vision SDK providing solutions across Media and Mobile markets, terrestrially. We saw a tremendous opportunity to bring a software-based edge solution to the Geospatial Intelligence market. This market has proven to be a significant driver of growth for the company.
Space Capital brings financial acumen and operational expertise resulting from the most developed venture capital track record and multiple successful exits as founders. Our primary areas of focus include GPS location services, geospatial intelligence, and satellite communications, and we specifically look to invest in companies that leverage these technologies. Specifically, we see opportunities in Advertising, Agri/Aquaculture, Augmented Reality, Climate, Cybersecurity, Finance, Insurance, IoT, Logistics, Mapping, Mobility, and Weather.
Once there is clear alignment between a founder and our firm, the diligence process begins. This process involves a collaborative effort across the Space Capital team and network to develop a 360 degree view of the company, its founders and partners, its customers, its goals, and ultimately its needs. This effort culminates in the drafting of a memo articulating observations about the company and its position within its intended market. The main areas we investigate include the management team, the board of directors, the product/service being developed, the market opportunity, the competitive landscape, the current financial records, and the perceived risk factors.
The goal at this point is not to evaluate a potential investment, but instead to gather information from a diverse set of perspectives and backgrounds that will act as the foundation for scoring the investment using a uniform and comparable system. This enables us to make more informed decisions in the synthesis stage.
After the memo has been drafted, we synthesize the 30+ page analysis into a short evaluation scorecard. The goal of the synthesis process is to quantify and summarize the memo so that we can compare the company with others in the industry, track company progress over time, and ultimately look back on successes and failures to define attribution.
From our over 50 years of collective investing and operational experience, we have found 33 indicators of success which we have grouped into seven criteria. These categories and their resulting weights are:
- Team - 30%
- Deal Dynamics - 12%
- Product/Service - 12%
- Board/Governance - 9%
- Business Model - 9%
- Market - 9%
- Competition - 9%
- Financials - 9%
Each company receives a score from 1-5 for each indicator, depending on the extent to which the company exhibits the definition associated with each step in the scale. This last point is critical and represents our team’s experience turned into concrete definitions that underpin the scoring of each unique indicator. Take the factor “Team,” for example. We have 10 indicators of success comprising the overall “Team” score. Two of these are below, along with the scoring guidelines for the indicator:
The score for “Teams” is given by the average rating of each of the ten indicators affiliated with the “Teams” category. After evaluating the other six factors by taking the average of the scores of each underlying indicator, the overall score is computed using a weighted average of each factor’s score.
Each indicator is of equal weight with the final overall score being a simple average of all 33 indicators. The approach helps us isolate both strengths and gaps that lead to productive conversations with founders, other investors, and within our team as we move to make a final investment decision.
Our Managing Partners weigh the balance of information and make the final decision whether or not to extend an investment offer. The Partners consider all information and documentation up to this point, and re-evaluate the extent to which Space Capital can be a strategic partner and resource to the company if an investment is made. If there is unanimous agreement, a term sheet is drafted or a commitment is extended. If the offer is accepted, we immediately prioritize supporting the founders with key activities that often must take place in parallel to the legal review process, which includes building an institutional board, establishing a diversity and inclusion strategy, and succeeding at bringing on the first key hires, This commitment to being a valuable partner to our portfolio companies begins with our first conversation and extends beyond the life of the company to the next generation of founders born out of our initial investment.