💸 WDWNTB. How Rampersand VC invests.

Are You Our Unicorn?

When assessing a founder or startup, how do we determine who we think will become a unicorn? When Rampersand VC firm first meets a founder, they are usually very early in their journey to building the future. While we review around 2000 start-ups in a given year, we only choose to invest in around five.

How do we decide which founders we believe have the potential to build unicorns? Every venture capital fund is different, but at Rampersand, we stage-gate the various levels of our deal flow funnel using our What Do We Need To Believe (WDWNTB) framework. This framework first makes us consider the following:

• What would need to be true to convince us to make a given investment?

• What evidence do we have for these potential truths?

• What leaps of faith do we need to make to invest?

In this article, I’ll explain how a deal goes through this framework and demonstrate how we ensure we invest in our ecosystem’s best companies.

What Are We Trying To Believe?

Every VC fund writes different check sizes and invests in varied numbers of companies, so what size of outcome is a venture capital fund looking for? While OpenAI’s $100bn valuation would be nice, not every start-up needs to hit this scale to have been a good investment. The industry standard at the seed stage for sizing the outcome we are trying to achieve is a return-the-fund calculation.

The return-the-fund concept is best explained with a worked example:

Rampersand’s current fund is $50m. For us to invest $1m into a start-up at a $10m valuation, we would need to believe our 10% ownership stake will be worth $50m upon exit to return the fund. If additional financing rounds don’t dilute us, we need to believe this company will be worth $500 million. Given that we expect multiple additional rounds with 10-20% dilution, the exit valuation we are trying to believe in is more like $1b. This back-of-the-envelope calculation simplifies but gives an idea of what Rampersand strives to develop conviction in.

Why Is Returning The Fund The Benchmark?

This boils down to a combination of targeted returns and portfolio construction. In the venture capital industry, the intention is to return at least 3x of the capital invested. History tells us only a few of our investments will go to the moon; therefore, we want to ensure that if they reach their full potential, there is enough of a reward on the other side to compensate for the risk taken.

The crucial difference between early and later-stage investing is that in later-stage investing, you start to move away from the assumption that most of your investments go to zero. This becomes true as start-ups become scale-ups, and there is a proven business model and go-to-market motion. Given there is less risk, there is a lower bar for returns, but the way of thinking about your portfolio also changes. Instead of all your returns coming from a few companies, all of your companies will have an expected return (2-3x).

What Do We Need To Believe?

It would be fairly uninformative to ask, “Do we believe this company will be worth $1bn,” so we break down the question instead. Ultimately, we are trying to come up with the three crucial components of a start-up’s story, which, if they were true, would mean a company can exit in the future at a $1bn valuation. The exact components will be different for every start-up and sector. They could be based on founder-market fit, market size, regulation, competition, and market dynamics. Although the components will differ, they will attempt to answer common concerns such as:

• Can you get enough customers?

• Can you charge these customers a valuable enough amount?

• Do you have an efficient way of selling to all these customers?

• Will these customers stick with your product/platform?

For different companies, you need to believe different sets of truths. For example, in a company that sells park planning software to local councils, you might need to believe there is a common need amongst all global local councils, that solutions are sticky across leadership changes, or that councils won’t just purchase local solutions. For a company selling a new freemium consumer app, you would need to believe the solution is good enough to convince people to download another app, that the problem hurts consumers enough that they will pay, and that consumers have a reason to keep coming back to the app.

Becoming A Believer.

Once we know what needs to be true, we need to determine how we can be comforted that these things are true. Ultimately, our ability to be comforted will be based on our belief that the founders will be able to tackle a big problem with an innovative solution. We deploy many tools to build conviction: desktop research, customer interviews, discussions with experts, founder meetings, reference calls, and anything else we have at our disposal.

We’ll never be able to remove all uncertainty around the pillars of investment, as this would require perfect foresight into the future. This is where the final part of the framework comes into place: leaps of faith. These are the areas we can’t definitively say are true, but we still believe the founding team will be able to solve them. Every venture capitalist will have a different risk appetite and, therefore, a different set of leaps of faith they are willing to make.

Stage Gating The Funnel.

Understanding the What-Do-You-Need-To-Believe framework makes it much easier to understand how we progress deals through our funnel to ensure we optimally spend our time on the companies we are most likely to invest in. Rampersand sees around 2000 companies per year and invests in around five. Below, we elucidate how these five companies are chosen.

Filter 1: Mandate

The first filter applied to companies is the Rampersand investment mandate. Our mandate is defined in the fund investment documents and is the agreed boundary for investment for a fund’s capital. For Rampersand’s most recent Future Tech Fund, we focus on technology companies from inception to Series A, focusing on data-centric companies. The mandate is relatively broad but means we filter out hardware medical developments, pure-play manufacturing companies, or direct-to-consumer goods. We also filter by region as we focus our initial cheques on Australia and Zealand.

Filter 2: Pitch Deck / Opportunity Narrative

Once we know a start-up is one we can invest in, we review their pitch deck/opportunity narrative. At this filter, we want to understand the prize, the founder-market fit, and whether there is an innovative plan. The mindset at this stage is always to open with “I want to invest.” Abhi on our team has a great article explaining how best to tell your story, which you can read here. Ultimately, this filter comes down to “Am I excited by this opportunity.”

Filter 3: Founder Meetings

We then meet with the company's founders to understand their vision. At Rampersand, we have a bias towards a robust go-to-market strategy. Especially in the current climate of a crowded AI market where tech is cheaper to build, those who can sell will win. At this filter, we want to understand the founders’ early go-to-market tests and their hypothesis on what will work as they scale.

Filter 4: What Do We Need To Believe

Once we have built enough conviction that this is an exciting opportunity and the founders have a solid and clear vision, we put the WDWNTB framework to work. This is done in collaboration with the founders as it aligns strongly with why they believe in their vision. As a team, we have extensive experience investing in great start-ups, and the crucial part here is finding the pieces of a coherent story that believably fit together. If the vision is unclear, it will be impossible to imagine the steps to achieving a $1bn exit.

Filter 5: Due Diligence

At this stage, there is a coherent and potentially believable story, and we set about trying to believe it. This stage takes the longest time but is crucial to building conviction. We are looking for supporting evidence that the WDWNTB could be true and that the skill of the early stage space is knowing the right leaps of faith.

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Abnormal Potential

At Rampersand VC Fund, we believe abnormal founders will deliver abnormal potential. It isn’t normal to change the world, so if you are a founder with a big vision, a clear strategy, and a hunger for building something great, then get in contact with us here.