As we navigate the investment process, from deal sourcing to final investment decisions, we’ve now reached the third step: the Analyst Call.
In our earlier blogs, we covered the deal sourcing phase — how we develop a strong pipeline — and the initial scorecard analysis, which provides an objective assessment of investments based on predefined criteria.
The next step is the Analyst Call, let’s deep dive.
Post the process of scorecard evaluation, the objective outcome is further analyzed by subjective judgment. This balance is a crucial part during an analyst call, where numbers and insights gained from initial evaluations are scrutinized further.
While objective data serves as a foundation for decision-making, it’s the subjective elements that often guide the choice.
The subjective elements create an Intangible Edge. An analyst relies on –
- connecting the dots,
- gut feeling,
- intuition, and
- experience
It’s often about reading between the lines of the numbers. Analyst have to assess factors that are harder to quantify:
– the passion and vision of the founders,
– the dynamics of the team, and
-the startup’s ability to pivot in a fast-changing market.
Take the early days of Airbnb. When Airbnb first approached investors, many dismissed it based on numbers alone. The idea of people renting out rooms in their homes to strangers seemed too niche and risky. However, those who believed in the founders’ vision and ability to create a new market saw something beyond the data. They sensed the potential cultural shift Airbnb represented, something data couldn’t predict at that stage.
Another dimension of subjective decision-making is assessing market sentiment, and future trends.
While the numbers talk about the current state of a business, intuition helps to predict the direction the market will take (well, its open for debate!).
In the early 2000s, when social media was still nascent, some VCs spotted potential in companies like Facebook based on early-stage user engagement, even though they had little revenue. While there wasn’t strong objective data to support an investment, subjective judgment about how human interaction was evolving led to one of the most significant investments in tech history.
The analyst’s review combines both sides.
- Objective data serves as a baseline, giving an analyst confidence that an opportunity has merit.
- Subjective decision-making, on the other hand, allows to go beyond the numbers.
Auxano invested into Aereo during 2019 at a valuation of ~Rs. 30 Cr, a startup deploying drones for enterprise applications at a time when drones were being banned from India. Until the team discovered the government’s agenda and founders’ vision. Aereo recently raised ~Rs. 130 Cr. in its Series B round.
An Analyst tries to capture what a Score Card Analysis does not:
- Founder’s Vision: Data doesn’t capture a founder’s ability to inspire or their resilience in tough times.
- Future Scope: Numbers are backward-looking; subjective decisions often anticipate future trends.
- Emerging Markets: Disruptive technologies or industries often lack historical data, making subjective judgment indispensable.
- Company Culture: Team cohesion and alignment with company goals, which aren’t easy to measure, can make or break a business.
In venture capital, subjective and objective decision-making are symbiotic. Analysts should be able to blend the two. Data builds the foundation, but subjective insights offer the foresight (and gut?) needed for the investments.
Too much objective focus may miss out on bold, disruptive ideas that don’t yet have the numbers to justify investment and too much subjective focus might ignore key data points that can lead to decisions based on hype, leading to potential losses when the business fundamentals aren’t sound.
Once the analyst takes the call, the call is further validated by the next step in the journey: Due Diligence.
Till then … points to ponder …..
Author:
Kanuj Jadwani
