The 6T Methodology. What does an early-stage investor look at?
03.15.2022
When evaluating a startup, an investor should determine, in the absence of in-depth data, how cool and fast-growing of a project this nugget can turn out to be in the long run. In the best-case scenario, it should also eventually become a unicorn (valued above $1 billion). This raises a reasonable question: what’s the best way of approaching the task? Zamir Shukho, general partner of the Vibranium.VC venture fund, speaks about an interesting and innovative approach now actively used in Silicon Valley – the 6T methodology.
The 6T methodology is based on 6 key parameters:
1) Team;
2) TAM (total addressable market);
3) Technology – technology and/or business model;
4) Traction – current project metrics;
5) Trends – companions;
6) Terms – terms of the deal.
Let's break down each of them in more detail.
Team
When it comes to early-stage startups, the founder and the team are absolutely key to project success. At this stage, the investor looks at whether the team is ready to create an awesome product and whether it has enough experience in building and managing an international business; in short, whether the team can perform in the market that they are creating their service or product for. More often than not, looking at the team is more of a psychological test of compatibility and location: whether the investor likes the people behind the project and whether the founder comes off as trustworthy when talking about the product.
TAM
TAM is the total addressable market. An investor needs to make sure that this is a large market, cumulatively exceeding $5 billion. It should go without saying that this strategic and innovative market is constantly growing and accessible to startups, without serious barriers to entry. For example, government and space technology aren’t good fits for these intents and purposes.
Technology
The third T parameter is technology. In other words, whether the startup has a breakthrough tech solution that is different from anything else on the market. In addition, a technological product should be based on a scalable, innovative business model, because unique tech alone is not enough for success. It's also important to understand exactly how that technology and the values of that product are communicated to the end consumer and how that consumer pays for that solution. Of course, if a startup has its own technology, that's one of the key factors of "investability". That's why an experienced investor will thoroughly check the intellectual property rights of the founder and its company. It is very important to think about these things in advance, to work with lawyers on the transfer of rights from the developers to the company.
Traction (Metrics)
Traction represents current project metrics. These include:
* CAS – the cost of customer acquisition;
* LTV (lifetime value) – customer value for the company (revenue generated per customer for the entire period of using the technology);
* Churn rate – how many customers continue to use your technology after the first experience.
These are different ways of measuring conversion from warm leads to hot leads, from hot leads to sales, and metrics are very important. They show how many customers are using your product, the average check, and how much time users spend with your technology or service. In other words, it's validation of product value, which shows how much the market believes in your product and how much consumers are willing to pay for it.
Trends
As an investor, you have to pay attention to various big trends. These can be related to geopolitics, sometimes to market changes and also to major shifts in technology. If we see a particular technology developing aggressively and taking over markets, then innovations based on that technology can become breakthroughs. Let’s take the AppStore as an example. The platform triggered the creation of an entire new industry for AppStore and GooglePlay apps and fostered a lot of unicorns. You have to keep an eye on micro and macro trends, and the startup itself has to understand, which ones it is directly involved in and which ones it can “surf” like a wave.
Terms
These are the terms of the deal. Each investor has a set of criteria to look at, such as evaluating startups of certain levels, or the investment round – seed round, round A, B, C, or vice versa, a pre-seeded investment, a bridge round. For example, we at Vibranium.VC invest at the startup's foreign market entry stage before the A round or before a significant big round. Let’s say the startup is looking for a $1M investment at a $10M valuation and is willing to negotiate a deal with the investor via a convertible loan or SAFE. More often than not, the investor and the startup will not agree on the valuation. The startup always wants to be worth more, and the investor wants to come in at a lower valuation so that after some time the valuation would go up and the investor would get a return on his investment.
Summary
The sequence of these parameters is very important, they follow this order for a reason. First is the team, then the market, the technology, then the metrics, and accompanying trends. The terms of the deal wrap up the list. If, for example, when looking at the market, you understand that it is small and not growing, there is no point in looking further at other parameters. Many investors in Silicon Valley use this methodology. Everyone has their elements that they add or subtract. If the startup meets all the criteria and qualifies as an "investable" project, then it moves on to the next stage of negotiations.
1) Team;
2) TAM (total addressable market);
3) Technology – technology and/or business model;
4) Traction – current project metrics;
5) Trends – companions;
6) Terms – terms of the deal.
Let's break down each of them in more detail.
Team
When it comes to early-stage startups, the founder and the team are absolutely key to project success. At this stage, the investor looks at whether the team is ready to create an awesome product and whether it has enough experience in building and managing an international business; in short, whether the team can perform in the market that they are creating their service or product for. More often than not, looking at the team is more of a psychological test of compatibility and location: whether the investor likes the people behind the project and whether the founder comes off as trustworthy when talking about the product.
TAM
TAM is the total addressable market. An investor needs to make sure that this is a large market, cumulatively exceeding $5 billion. It should go without saying that this strategic and innovative market is constantly growing and accessible to startups, without serious barriers to entry. For example, government and space technology aren’t good fits for these intents and purposes.
Technology
The third T parameter is technology. In other words, whether the startup has a breakthrough tech solution that is different from anything else on the market. In addition, a technological product should be based on a scalable, innovative business model, because unique tech alone is not enough for success. It's also important to understand exactly how that technology and the values of that product are communicated to the end consumer and how that consumer pays for that solution. Of course, if a startup has its own technology, that's one of the key factors of "investability". That's why an experienced investor will thoroughly check the intellectual property rights of the founder and its company. It is very important to think about these things in advance, to work with lawyers on the transfer of rights from the developers to the company.
Traction (Metrics)
Traction represents current project metrics. These include:
* CAS – the cost of customer acquisition;
* LTV (lifetime value) – customer value for the company (revenue generated per customer for the entire period of using the technology);
* Churn rate – how many customers continue to use your technology after the first experience.
These are different ways of measuring conversion from warm leads to hot leads, from hot leads to sales, and metrics are very important. They show how many customers are using your product, the average check, and how much time users spend with your technology or service. In other words, it's validation of product value, which shows how much the market believes in your product and how much consumers are willing to pay for it.
Trends
As an investor, you have to pay attention to various big trends. These can be related to geopolitics, sometimes to market changes and also to major shifts in technology. If we see a particular technology developing aggressively and taking over markets, then innovations based on that technology can become breakthroughs. Let’s take the AppStore as an example. The platform triggered the creation of an entire new industry for AppStore and GooglePlay apps and fostered a lot of unicorns. You have to keep an eye on micro and macro trends, and the startup itself has to understand, which ones it is directly involved in and which ones it can “surf” like a wave.
Terms
These are the terms of the deal. Each investor has a set of criteria to look at, such as evaluating startups of certain levels, or the investment round – seed round, round A, B, C, or vice versa, a pre-seeded investment, a bridge round. For example, we at Vibranium.VC invest at the startup's foreign market entry stage before the A round or before a significant big round. Let’s say the startup is looking for a $1M investment at a $10M valuation and is willing to negotiate a deal with the investor via a convertible loan or SAFE. More often than not, the investor and the startup will not agree on the valuation. The startup always wants to be worth more, and the investor wants to come in at a lower valuation so that after some time the valuation would go up and the investor would get a return on his investment.
Summary
The sequence of these parameters is very important, they follow this order for a reason. First is the team, then the market, the technology, then the metrics, and accompanying trends. The terms of the deal wrap up the list. If, for example, when looking at the market, you understand that it is small and not growing, there is no point in looking further at other parameters. Many investors in Silicon Valley use this methodology. Everyone has their elements that they add or subtract. If the startup meets all the criteria and qualifies as an "investable" project, then it moves on to the next stage of negotiations.
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