The Investor's Matrix
The Takeaways
- The market is a key factor for investors when assessing startups.
- Investors focus on market growth and market vacancy.
- The Investor's Matrix can help you to understand the implications.
The first question any VC asks when assessing new investment opportunities is, “What do they do?” That seemingly simple question packs a lot of key information for the investor, the most important of which is the market space.
The market and space are key factors for VC investors. Because they're searching for potential unicorns, the first thing they want to see in any opportunity is a BIG space. However, this is something misunderstood by most founders (and even some investors).
Big doesn’t just mean size.
A large total addressable market (TAM) is important, but it's far from enough. Investors are used to evaluating huge markets, so size alone doesn't excite them. They also intuitively understand that the real market is much smaller once you dissect it into specific categories and use cases, factor in the competition, and consider the rate of adoption over time.
In reality, what truly matters to investors are two key factors: market growth and market vacancy.
Market Growth
Is the market active and growing?
Since investors bet on the future a few years down the line, it’s important for them to get into markets that are conducive to hyper-growth. Basically, they want to ensure that their portfolio companies will operate in spaces that benefit from tailwinds rather than facing headwinds, which will slow them down. For that reason, investors pay special attention to the expected future market growth, innovation, and overall activity.
Market Vacancy
How fierce is the competition in the market?
Are there incumbent players who already dominate the market?
It's no surprise that investors prefer spaces with no dominant players already in place. It's much more reassuring to invest in a new and upcoming space than in a crowded market where you have to unseat an incumbent.
The Investor’s Matrix
These two factors, market growth and market vacancy, shape how investors view the opportunity and how closely they scrutinize it. Think of these factors as the foundation and the starting point for the investor’s analysis. Obviously, having leeway is preferable to facing intense scrutiny.
To visualize the investor’s perspective, we can chart a matrix that’s similar to the BCG matrix while using market growth and market vacancy as the axes. Basically, any investment opportunity will fall into one of four quadrants, which will determine how the investor may view the opportunity, which areas she will focus on, and how much scrutiny will be applied.
- Star quadrant = similar to the star quadrant in the BCG model, it’s a highly desired position from the investor’s perspective, representing a new category that’s growing at a rapid pace without having any dominant incumbent players.
- Butterfly = this quadrant represents a space that already has dominant incumbent players, but at the same time it’s still growing at a rapid pace, so there’s still room for new market entrants to grab market share. Why did I choose a butterfly for this quadrant? That’s because, just like a butterfly, the startup entering this space will most likely need to shapeshift (pivot) and float until it lands on its niche.
- Dog = similar to the dog quadrant in the BCG matrix, it’s for the most part an undesirable position. It means that the company is going to operate in a space with several established incumbents. At the same time, the space is mature, grows modestly (if at all), and thus leaves much less room for startups to enter and grab market share. Any startup entering this space will need to work extra hard to win. It’s basically going to be a dog-fight.
- A question mark = similar to the question mark quadrant in the BCG matrix, it represents an unclear position, which depends on the category’s size and dynamics. One example is large categories primed for digital transformation (e.g., ride hailing before Uber), and thus could be a great investment opportunity. On the other hand, it may also be a small, premature, or non-viable category (e.g., virtual fitness training that hasn’t materialized into a viable mainstream market). Oftentimes, success in this quadrant depends mainly on the startup's ability to change behaviors within the existing category, something that’s not easy to do and leads to a high cash burn.
What does this mean for you?
Now that you have this matrix, you can put yourself in the investor’s shoes and anticipate their concerns. This matrix dictates the investor’s perspective and the questions they will ask you. Use it to determine your quadrant, be better prepared to address investor scrutiny, and tailor your pitch accordingly.
Whenever you're ready, Leap can help in 3 ways:
- First check: infusing startups with up to $300K to boost initial market traction.
- GTM: accelerating GTM from 0 to $100K ARR to position for fundraising.
- Fundraising: orchestrating a VC Pre-Seed / Seed round.
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