Viewing Start-ups from an Investor Perspective

Lusi: Much of our content is from the perspective of experienced start-up operators, but we wanted to also share a perspective from an investor.

Today, we're speaking with Hayley Chan, a growth investor who has been involved both in the private and public markets.  Her latest roles are in late-stage venture capital and growth equity at Softbank and Athena with a focus on fintech. Hayley, could you share a bit about your background and perspective as an investor?

Hayley: Certainly. I’m a growth investor. I started my investing journey during the financial crisis in private equity when I took deep dives into businesses and aimed to learn everything about them. In particular, I valued primary research to help drive a differentiated thesis. 

Post business school I transitioned into public markets investing, initially at a mutual fund and later at a crossover hedge fund.  These years in the public markets were the formative years for me as an investor, when I developed my own investment style and frameworks, and refined my intuition and pattern recognition. The public markets present a challenge due to the limited information available compared to the private markets. While it's crucial to understand companies and markets deeply and formulate a solid thesis, it’s equally important to invest at the right price with a clearly identified catalyst that unlocks the projected returns, a perspective I’m particularly sensitive to as a private markets investor where my passion lies..

Six years ago I returned to the private markets through Softbank and Athena.  I wanted to come back to the private markets because I very much enjoy working alongside entrepreneurs, feeling inspired by their vision, passion, and execution. Working together, we strive to reach their next milestones and contribute to the growth of their companies.

Lusi: This conversation was sparked by your recent advisory work for companies, where even in Series C and D companies, you’ve noticed gaps in what investors typically expect.  My experience and the audience of this blog is most likely more earlier stage companies, but I thought it'd be helpful for the earlier stage companies to hear the types of metrics that should be put into place from the beginning so that when you are raising a larger round, you already have the fundamentals in place. As an investor, what are the things that you expect to see when a company approaches you?

Hayley: In the initial meeting, my primary goal is to understand the company's core offerings, market opportunities, and their unique approach. From there, I delve into their product, competitive edge, and business model, focusing on the quality of revenue and margin structures. I also look for a first impression of the management team, paying attention to how they tell the story and importantly how they support their story through key performance indicators (KPIs). 

Some of my approach goes back to my experience as a public markets investor.  I don’t necessarily need to invest only in the best companies, but more importantly I’m looking for an investment opportunity.  So valuation is very important, as well as a deep understanding of which KPI is driving valuation which differs across industries, companies, or even for the same company at different times.  

Applying this to a private company context, as I meet with new companies I’m trying to figure out which KPIs are the most important for them at that time, KPIs that summarize the essence of the business and driving their valuation in the current stage.  

For example, as a company scales the most important KPI may be user growth, which can demonstrate product market fit.  For a later stage company, it may be a measure of unit economics, which can be a reflection of favorable competitive dynamics and a sound business model.  It's really important for management to have a good sense on their key KPIs, providing focus for them and their team.  

Lusi:  So it sounds like the two key things are

1. The management team and

2. Data and KPIs. 

When assessing management, aside from credentials, what qualities stand out for you?

Hayley: The ability to articulate a clear and compelling story is crucial. I appreciate when a management team can succinctly communicate the essence of their business.  This is helpful for me as an investor to get to know the company and market opportunity.  It is also important in communicating management’s vision and strategy to their teams, as well as marketing their products to customers.

I also look for strong CEOs and cohesion within the leadership team. A visionary leader, knowledgeable of all facets of their business, alongside a capable team with diverse strengths, adds credibility. This teamwork often shines through during question and answer sessions in meetings.

Lusi: Next, you emphasized the importance of KPIs, both at the board and management levels. How do you recommend companies approach the selection and presentation of these metrics?

Hayley: Prioritization is key. For investors and board members, it is often no more than three to five metrics that they focus on to evaluate a company’s performance.  Exactly which metrics may evolve over time based on the company’s stage and business goals.  

Management may require a broader set of KPIs to grasp shifts in the top three to five metrics mentioned earlier, offering a qualitative account of past movements. Additionally, incorporating KPIs that serve as leading indicators is crucial for guiding management actions and strategic adjustments.

One thing I’ve observed in the boardroom of companies, even in their Series D+, is that they may note a shift in a significant KPI, yet it often takes an additional quarter or two to identify the reasons behind these changes, thereby missing opportunities for timely action.

When selecting key metrics, a helpful question to ask is what are the most direct underlying drivers of revenue. While this may seem obvious, it can be less straightforward and more nuanced. For example, I invested in a Series D embedded finance company where revenue is generated when their customer’s end users use their capability. The company has a diverse group of customers, each using their capabilities differently. Moreover, the company’s customer contracts vary in structure. Despite having a very thick board presentation with many pages of revenue metrics, such as the number of open and funded accounts, the most direct revenue driver is missing: the number of end user accounts generating revenue.

Key metrics should evolve over time to mirror the shifts within a business. Another example is a consumer app company where I led their Series D investment. The company caught my attention when its app store downloads surged from 2 million to 5 million within a year, which was incredible. At the time of my investment, the key KPI was user growth.  However, once the company’s user base surpassed 10 million, my focus shifted to user retention. 

Lusi: I remember in one of our conversations you mentioned that even though sometimes companies give you data in a data room, you'd actually transfer that data to a standard format, so that you can judge investments on an equal footing. Can you shed some light on the investor's perspective on that data? And should companies be trying to standardize their data?

Hayley: The example we spoke about was unit economics. While there are various methods to present it, such as using revenues or gross profit, my preferred approach is using contribution margin. As you mentioned, I usually recalculate unit economics using my method to benchmark against other companies with similar dynamics.

As an investor, the value I bring in these conversations is perspective - what is considered as good in this industry or at different stages of growth. I don't view taking a different approach from my preferred method negatively, but rather appreciate management who can articulate their approach and rationale. Collaborative discussions often reveal insights into why alternate methods are chosen, providing a deeper and more nuanced understanding of the business.

Lusi: If a company lacks strong numbers but has a compelling story and team, how do you approach such situations?

Hayley: Every company holds the potential to become a compelling investment at the right price. Valuation is another crucial factor when evaluating an investment opportunity. When late-stage companies lack robust numbers, projecting financials becomes harder, leading to a more conservative approach due to the higher uncertainty. Lower projections translate to a lower valuation, which can provide a greater margin of safety making an investment more attractive.

Furthermore, there are instances where investors are comfortable with an investment thesis or investment framework, enabling them to invest confidently even before seeing strong numbers. Again, they are also likely benefiting from a lower valuation.

For example, during the mid-2010s, I invested behind a theme where software companies transitioned their revenue model from license-based to subscription-based. Observing the meaningful increase in the lifetime value of customers when there is a sticky customer base, I began investing into similar trends among other software companies. Because of my conviction in this investment thesis, I could invest earlier, even before numerical proof emerged. Again, valuation is also more attractive before a trend is evident. So, having conviction in an investment thesis alongside an attractive valuation is helpful when a company lacks strong numbers.

Lusi: In summary, having a clear and compelling story, along with well-chosen and communicated KPIs, seems to be critical for companies seeking investment. Thank you for sharing your insights, Hayley.

Hayley: You're welcome. It's been a pleasure discussing these aspects of investing with you.

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About:

Lusi is a partner of The Thirteens, a start-up consultancy of fractional executives covering multiple functions and industries, supercharging your start-up to the next level.

Hayley Chan is a network advisor with The Thirteens, if your company is getting ready to raise your next round and want an experienced investor’s eyes on if you have a compelling, clear story and the right set of KPIs, feel free to reach out for a consultation.