2018

Finding Gems: Our Investment Thesis & Parameters

Originally posted in 2018, this blog has been updated as of March 2022 to reflect Laconia’s current investment focus, strategy, and process. If you remember reading something different before, you’re (probably) not hallucinating! For additional resources, you can check out our FAQ, sign up for an office hours session with our investment team, or submit your information for funding consideration.

This is part 2 of a 5-part series. If you haven’t done so already, you can read the first post here.

Very often when we meet founders, whether they are pitching their company for investment or just asking for our insight during one of one of our office hours sessions, they ask what would make them a “sure venture capital investment opportunity”. The short answer we give is that there is no such thing, because every single VC firm has different investment theses/parameters. One perspective we can offer is the overview below of our own strategy.

Solving High Pain-Point Problems in Existing Markets & Workflows

On a broad level, we invest in the next stage of legacy industry digitization. We are focused on companies using technology to solve high pain-point problems and inefficiencies within existing markets and workflows. We still see massive opportunity in traditional sectors, as they transition from pen & paper processes to digital solutions, from fragmented digital solutions (e.g. Excel spreadsheets & in-house tools) to better workflow platforms, from workflow platforms to AI-powered analytical systems, and so on. As technology evolves, new business use-cases emerge, creating an endless loop of investment opportunities.

To be clear, we are not investing in incremental solutions. Much of our analysis of companies’ potential is through the lens of a founder. As an investor managing a portfolio, you have multiple shots at success.  As an entrepreneur, you place your bet on one shot, typically for a minimum of 5 years. A quick mental model we use to evaluate the upside potential of an opportunity is “Would I be excited to join this company for the next 5 years?” If the answer is yes, we’d seriously consider the investment opportunity.

Pre-Seed & Seed B2B Software

To dive into the specifics, we invest in pre-seed & seed-stage B2B software companies, predominantly headquartered in the US & Canada. We typically write checks of $250,000 - $1,000,000 in rounds of $1M-$4M. Within B2B, we are sector-agnostic, with investments in fintech, e-commerce infrastructure, supply chain, hospitality tech, retail tech, digital health, and more. Depending on the company’s stage and capital needs, we have some flexibility beyond these guidelines, but this is where we are spending the bulk of our time.

Below are the considerations driving these investment parametrers:

  • Capital efficiency:

    • Focus on fundamentals: Our <$1 million investment amounts are best utilized in capital-efficient companies that can achieve “break-even optionality” before/after their Series A round. While we are, of course, seeking outsized returns (i.e., companies that have the potential to reach $100M+ in annual revenue), we believe that setting a strong and sustainable foundation in the early stages — before raising tens of millions of venture capital dollars — is critical to ultimately achieving that outcome. As we all know, the more money is raised, the higher the bar is for an exit. We are cognizant not only of our own equity stakes but also our founders’: we want them to be in the strongest position for their best possible personal outcome rather than pricing themselves out of most lucrative exit options.

    • Early B2B traction: Typically, B2B companies are more capital efficient (at least in the early stages) than B2C ones, which typically require significant upfront capital for user acquisition before activating any revenue models. We typically like to see some validation of market demand and ideally early revenue & customer engagement metrics before investing.

    • Software scalability: Though we are typically sector-agnostic, we do focus on software & avoid capital-intensive segments such as energy, agriculture, most hardware products, and two-sided marketplace models with high capital requirements for “chicken or egg” user acquisition models.

  • Business resilience:

    • Active support: We build concentrated portfolios driven by strong conviction and and high support. As a result, we are intensely committed to all of our portfolio companies; we don’t write off & walk away from them when they hit a rough patch. Given our expectations of a higher-than-average portfolio success rate, we focus on companies that are solving mission-critical problems.

    • B2B inevitability: While many B2C companies rely on customers’ (somewhat unpredictable and fickle) tastes, B2B problems and solutions are typically objectively definable, identifiable, and quantifiable. In most cases, you can put a number to how much time and/or money is wasted by or allocated toward solving a given business inefficiency. Additionally, solutions to high pain-point problems typically have an “inevitability” to them. As just one example, AutoFi connects car dealers & lenders to enable the purchase & financing of vehicles instantly online from home, a solution that is undoubtedly bound to exist.

    • Market validation: While we don’t have hard revenue minimums to consider an investment, we like to see validation of customer demand, product stickiness, and, if possible given the company’s stage, high retention. Though the actual metrics and key indicators will vary from company to company, we are fundamentally looking for evidence that a given product is a “must have” rather than a “nice to have”.

    • Headquarters in US & Canada: The past two years have drastically changed the way we invest. While historically we’ve been focused on companies in Northeast major markets (largely NY, Boston, Philly, and DC), we have adapted to running our investment process and supporting our portfolio companies largely remotely. For Fund III, we have broadened our aperture to include all of the US and Canada, with a particular interest in regions that are historically underserved from a capital perspective. We also have the flexibility to deploy 20% of the fund’s capital internationally beyond the US & Canada, allowing us to take on opportunities beyond our more traditional filters.

  • Alignment with Laconia’s strengths

    • Core team expertise: We stick to what we’re good at. While there are many investors looking at B2B software, we specialize in this, bringing deep expertise in B2B sales, marketing, and business development that moves the needle on getting seed startups to Series A and beyond.

    • Network value: Our LP relationships and extended networks are a strong fit for B2B as well, enabling us to open doors to customer intros as soon as we dive into due diligence.

We hope this overview provides some insight into our thinking. Next up, we’ll dive into the entrepreneur profile we seek. Until then, let us know if you have any feedback here or on Twitter — @jsilverman22, @djarcara, @geri_kirilova, @JailwalaReena.