6T Methodology. What does the early-stage investor look at?
15.03.2022
When evaluating a startup, the investor should determine, in the absence of in-depth data, how much of a cool, fast-growing project this nugget can turn out to be. Preferably, it should also become a unicorn (valued above $1 billion). It raises a reasonable question: how to do it? Zamir Shukho, General Partner of the Vibranium.VC venture fund speaks about one of the interesting innovative approaches actively used in Silicon Valley - 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 key factor in the success of a project is its funder and team. At this stage, the investor looks at whether the team is ready to create a cool product and whether this team has enough experience to manage and build an international business. Whether that team is going to be successful in the market in which they are creating their service or product. More often than not, looking at the team is more of a psychological test of compatibility and location, whether the investor likes the team and whether there is a certain level of trust in the funder's words about their project.

TAM
TAM is the total addressable market. An investor needs to know that this is a large market, which cumulatively exceeds $5 billion. It should be understood that this strategic and innovative market is constantly growing, and startups do have access to it. It's not some government market or, for example, the security or space technology market, which are very limited. The main market niches do not have any serious barriers to entry.

Technology
The third T parameter is technology. In other words, whether the startup has a breakthrough technology that is different from anything else on the market. In addition, a technology product should have a scalable, innovative business model around it, because a unique technology 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 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 funder 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 is the current metrics of the project. There are such basic metrics as:
* CAS - the cost of customer acquisition;
* LTV (life-time 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 metrics of conversion from warm leads to hot leads, from hot leads to sales. These metrics are very important. They show how many customers are using your product, average check, and how much time users spend using your technology or service. In other words, it's a validation of the product value, which shows how much the market believes in your product and how much it is willing to pay for it.

Trends
There are various big currents that you have to pay attention to. These can be related to geopolitics, sometimes to market shifts and also major trends in technology. If we see a particular technology developing aggressively and starting to take over markets, then innovations based on that technology can be breakthroughs. For example, the emergence of the notional AppStore. When it came out, there was a whole industry of creating apps for the AppStore and GooglePlay platforms. A lot of unicorns appeared, which thanks to this trend (the emergence of a new trend), became possible. So you have to keep an eye on trends and macro trends, and a startup has to understand which macro trends it is directly involved in and on which wave it can ride on its "surfboard".

Terms
These are the terms of the deal. Each investor has criteria that he looks at - the evaluation of a startup of a certain level, which investment round (seed round, round A, B, C). Or vice versa, a pre-seeded investment. It could be a bridge round. For example, Vibranium.VC fund invests at the startup's foreign market entry stage before A round or before a significant big round. The startup is looking for a $1 MLN investment at a $10 MLN 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 do 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. The sixth parameter is the deal terms that investors pay attention to.

Summary
The sequence of these parameters is very important, they are set out in this order for a reason. First is the team, then the market, the technology, then the metrics, and accompanying trends. And only last are the terms of the deal. 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 take away. If the startup meets all the criteria and meets the understanding of an "investable" project, then it moves on to the next stage of negotiations.