With the current state of the markets, many Silicon Valley VCs are slowing down their investment dollars and changing their strategies to be more disciplined. In the Midcontinent — which includes Oklahoma, Missouri, North Texas, Arkansas, Colorado, and Kansas — we’re not seeing the same swings in investment strategies as investors on the coasts. This is at least in part because Midcontinent investors have always needed a higher level of discipline than VCs in places like Silicon Valley, where investment dollars are plentiful and ex-FAANG entrepreneurs and developers abound.
There are three important metrics that Midcon VCs utilize to determine if a startup is a strong investment: path to profitability, consumer-driven products, and real products with early traction. These metrics may surprise you as they differ somewhat from common perception of how VC works, but these metrics nearly always show in top venture investments. For the duration of the bear market, the discipline of Midcon investment strategies will help to limit risk and maximize returns. We might even see coastal VCs pivot toward these Midcon metrics…
1. Path to Profitability
In an industry like venture capital where revenue and user growth at all costs has been the norm, “profitability” has historically been a borderline dirty word. If you (like most of us) have recently watched WeCrashed, depicting the rise and fall of WeWork, you saw first-hand that growth above all else does not by itself make a great business. When you are not watching profitability, businesses and investors are not set up for real success.
Midcontinent investors are significantly less likely to invest in business models that prioritize massive user growth first and plan to figure out monetization down the road. At Cortado, we push to deeply understand a company’s specific revenue model and path to profitability, and most of our companies have gross margins >50% (>70% for SaaS, with hard tech companies or hardware/software companies closer to 50–60%).
Important metrics that a Midcon VC might use to understand your path to profitability include:
- Unit economics — What is the margin for delivering one unit of your product? To continue the WeWork example, when a single WeWork location wasn’t profitable, adding hundreds of locations as fast as possible only led to a serious cash burn problem.
- Scalability — How does that margin change with economies of scale? Does every additional customer require a significant amount of time or other cost?
- LTV/CAC — The LTV (lifetime value) to CAC (customer acquisition cost) ratio is a measure of what each customer is worth to your company over time. If you have to spend $500 to acquire a single user, and that user only pays for two months of your SaaS platform at $100/month before they cancel or churn, that’s a LTV/CAC ratio of <1, and essentially the business will never be profitable without significantly reducing either your churn or your acquisition cost.
- Breakeven — At what point could the business begin to operate profitably if no more investment dollars are available?
2. Customer-Driven Products that Add Value
Another important driver of investment conviction for Midcon investors is understanding how a product specifically creates value for a customer. The value proposition that a startup’s product provides to its user is always important, but especially important in a bear market, when customers may avoid any purchases that don’t directly generate monetary value in some way.
The if you build it, they will come mentality simply doesn’t cut it here. Midcon investors are more likely to avoid startups whose products are innovative but offer no real use case, weren’t built with the customer in mind, or rely on trends or virality to be successful.
Important metrics that a Midcon VC might use to understand your product’s value add:
- Customer ROI — How does your product create financial value for the user (time saved, cost reduction, generation of additional revenue, etc.), and how does their investment in your product pay off over time? This one can be tough for products that solve a problem but aren’t a part of a company’s daily operations. For example, one of our portfolio companies Senslytics has an AI monitoring technology that can help prevent seldom but very expensive disasters for the oil & gas industry. Senslytics embedded themselves with the customer to understand the likelihood, frequency, and cost of these major events in order to build a business case for the pilot customer for why this tech would save them money and in what amount of time. They then proved their tech could actually perform through a pilot program, and that customer-focused data was vital to helping them obtain Seed financing.
3. Real Products with Early Traction
A big differentiator between Midcon investors and those in major tech hubs is a proclivity for investing post-product. That’s not to imply that there aren’t any idea-stage investors in our region, but they do seem to be few and far between. Part of this is related to talent — in the Midcon we have fewer serial entrepreneurs and founding engineers with proven track records and a demonstrated ability to build. Rather, our region’s entrepreneurs are more likely to come from years of industry experience which they use to identify problems in need of solutions, and they likely have the expertise and network to be successful, even if they are first time entrepreneurs. This is a stark difference from a place like Silicon Valley, where it seems everyone in the tech ecosystem is either ex-FAANG or on their fourth or fifth startup. Many Midcon founders are developing products to overcome the very barriers they faced while in the industry.
Important metrics that a Midcon VC might want to see regarding product & traction:
- Minimum Viable Product (MVP) — Do you have a functioning product that a customer can use and test? If it’s not a full blown V1, were you gritty and resourceful enough to hack a prototype together and get user feedback, even if it’s a no-code tool that will eventually have to be rebuilt?
- Month-over-month growth — If you have a complete product, is your team able to sell it? What has the customer feedback been? Are you seeing organic user adoption or is the sales process long and complex?
Pitching to investors in the current market can be intimidating, but being prepared to answer the questions above can set you apart and show that you’ve done the legwork to understand the current climate and what disciplined investors are looking for.
One last thing of note — even if you have all these pieces in place, be prepared for reasonable valuations. Investors in the Midcontinent have historically been less likely to bite on frothy valuations, and in a bear market it’s becoming even more important. Know that investors that want to close a deal with you are on your team not against you, and a lower valuation may just be the best way to set you up for success at your next fundraise.
At Cortado Ventures, we invest in pre-Seed through series A startups with a focus on energy, logistics, life sciences, and future of work. To pitch us, please fill out our funding application.
About Cortado Ventures| Cortado Ventures is an early-stage venture capital firm that invests in ambitious, growth-driven companies to define a new generation of economic prosperity for the Midcontinent region.
As one of the largest VC funds in Oklahoma, Cortado’s focus is on tech companies bringing innovative solutions to the energy, logistics, life sciences, aerospace, and the future of work sectors. For more information, visit cortado.ventures.