In a recent Linkedin commentary, PeakVenturesCapital.com claimed that, after its due diligence of over 2,000 companies in 11 months, it summarizes the potential of each startup into its 5 T’s criteria while using the colors green, yellow and red, to represent positive (green) to negative (red). The most greens meant that the company passed the first hurdle. The more reds represented the reject (“pass”) bin.
The Five T’s are (T)eam, (T)erms, (T)raction, (10X) Potential, and (T)echnology. Note that my many blogs do address each category in detail, but this color branding process confirms what I keep saying about VC firms – they go through so many deals that their wealth of experience distills their screening process to this five generic factors. Others use other screening tests with more extensive lists. Some VCs I have noticed have a list of 10-12 indicia and use a point measuring system that the more points the company got, the higher likelihood of going to the next phase. What stands out about the 5 T’s is the ability to foresee whether a startup meets some minimum standard.
(T)eam: Again, it behooves the investor to see whether the dedicated team has some expertise in the business they started. For raising capital for recapturing oil and gas, I recall one guy’s short CV describe himself as a graduate of the Tony Robbins University with an expertise in landscaping, but the business plan called for oil drilling. This is a dramatic example of what not to show on a business plan. And I have stated that academic institutions do matter, especially in the technical fields. And investors do know that as well.
(T)erms Well, as my blogs indicate, know your valuation and your numbers. If you don’t know them, then hire someone with that expertise. Not too long ago, I was shown the financial spreadsheet of a medical type business. My first comment was how were the numbers generated and what were the assumptions. And the reason for that comment, I thought that the numbers did not clearly show in detail how they reached their annual projections. Too much was missing. And that alone will generate a red flag to any investor. The reason for this “T” is when both parties are at impasse on reaching a final term sheet – one assumes a too high a valuation, quite mistakenly, and the other, a far lesser valuation. You can’t win that battle.
(T)raction Again, no product has commercial viability if no one is interested in buying it. I do have an extensive blog on traction – which can be defined by growing numbers of customers, distributors. I have sat through extensive presentations where I question the ability of getting customers, as the product would not attract BtoB or BtoC clientele.
(10X) Potential I address this as the Total Addressable Market (TAM) —how big is it? Any VC only invests in businesses that achieve his mandated ROI, described on how VC firms operate. Small markets mean less revenues. Why 10X? To achieve that a company must grow at an annual rate of 30% or more annually.
(T)echnology What is different about this company that gives it a competitive advantage over the industry? What is proprietary? I do address whether a patent filing is required. But a company without some advantage cannot survive for long. And I think that term, technology, is too narrow. I believe that a company should market a product needed by consumers – it can be a service or hardware such as a better mousetrap. It is a product that has certain efficiencies with it – it improves a consumer’s bottom line or increases efficiency. And the product can be deployed quickly and efficiently, without regard to filing IPs, as in the case of Groupon.
What stands out of the 5T’s is the way that some VC firms attempt to simplify the screening process as quickly as possible. Every startup has to be aware of that indicia. But note that once the true diligence begins, then the details will be needed to fill out everything in those 5T’s.