Over the past several years sifting through thousands of business plans, company presentations, pitches and demos a formula emerged. It is a formula for what many investment firms including our own look for in a company. This formula is what I like to call the M.E.A.T. and many of my colleagues often look for these same core attributes. So what does it stand for?
How big is the market? Venture firms sometimes differ on what market sizes, market types and market viabilities they like but they all agree that there needs to be a market for a product. Many times a CEO or Founder will say the market is some huge number representing all segments of that market. For example, if this was a next generation smart phone for kids, showing us the total smart phone market as the available market would be incorrect. The market for that phone would be a segment such as smartphone users under the age of 12. That is the size of your total available market and it is what investors are looking to understand. Investors want to know how big this company could potentially be. If the total available market for your product is $100 million your company then has a ceiling of $100 million with 100% of the market.
Who is running this company? We are the investor not the management. We want to know that the team building this company is driven, focused and capable to do so. This is often that missing link many inventors and founders sometimes miss. They will think their new widget is the greatest thing since sliced bagels and think it will "sell it self." The reality is if no one knows about your technology or how to get it, no one will. Many investors will tell you they would rather have an amazing team with a mediocre technology than a mediocre team with a great technology. It's ok if you haven't got all the roles filled. This is something venture firms can help with but knowing the core group of people who built the company and are committed to its success goes a long way. Especially when the people involved have built businesses before and know what it takes to successfully reach an exit.
Who are your customers? The simplest way to show demand for your company's product is to show customers who have expressed a need for it or already use it. The higher quality the customer the more interested an investor will get. If you have Microsoft or Johnson Controls as one of your early adopters it shows real promise for the future. It also gives investors a customer to call to see if they are satisfied and ask why they need this technology. It also identifies possible acquirers of the company in the future which all add up to a more interested venture investor. This is also a vote of confidence when talking about the final part of our formula.
What does the company do? You can't have a technology company without... technology. Here we look at a number of different points. Is this a technology developed by the company or being used by the company? Is it proven to work commercially or still a prototype? Is it something they have protected with patents or is it more trade secrets? In the end the central question becomes: is the company's technology easy to replicate or is it something truly unique? As investors we have to mitigate as much risk as possible when making investments in companies. Knowing that a technology is unique or protected means once it is successful it is not easily copied or stolen.
What is important to understand is that there is no perfect formula. Venture firms all have their own criteria and metrics in which they analyze companies. The M.E.A.T. formula is just meant to highlight the general themes we all tend to look for and give you some insight into what questions to expect.
Director ERGO Capital