November 16, 2017
I am often asked what separates the startups we choose to invest in versus the ones opt to forgo. The truth is there’s a lot that goes into evaluating companies through the lens of their investment potential. And while we absolutely look at the facts, figures and people behind each prospective venture, the full scope of how we make our decisions is even more expansive.
It’s not always easy to explain to founders what we’re looking for precisely, but there are numerous factors we consider heavily as we make the call whether to fund or not to fund. To further illustrate, here’s a look under the hood at our decision process for investing in one of our favorite companies, WebPT, the leading rehab therapy software platform.
Steady, Repeatable Growth
Before we ever began our investment conversations, WebPT was consistently bringing in $70,000 per month of recurring revenue. The company was operating pretty lean and efficiently, and sales deals were being closed left and right. WebPT was growing 10-15 percent every month, and it was obvious that this growth was not just holding steady –it was accelerating.
All of this was very noteworthy to us, considering it foreshadowed the likelihood of an impressive return on our capital investment. We had strong belief in the company’s ability to bring in revenue because it was already being demonstrated.
Optimal Market Position
In addition to gauging revenue potential and growth, we always look at the context of a venture’s place in the greater market. Even if a company has a stellar product, like WebPT, we don’t want to fund it unless we know we can generate enough return while not having to go up against goliath competitors.
In WebPT’s case, all of these boxes were checked perfectly. We like markets that bring in less than $500 million, and the rehabilitation industry was less than half of that, yet still big enough to yield us a great rate of return.
Furthermore, the competitors we were going against were old, client server technology, Excel spreadsheets and pen-and-paper documentation. There was a real need for WebPT’s software, and it wasn’t a hard sell since none of the competing choices were even mildly attractive. WebPT was a solution people were excited to see, and it was also positioned ideally in the marketplace, from our standpoint.
Savvy Decisions at the Top
We always look at the leadership of the organization, as founders are not always the best to serve in the executive position. In this case though, the cofounders had a proven track record, but even more promising was the fact that before they hit $1 million per year in recurring revenue, they had the foresight to bring in a seasoned CEO to take over operations. This eliminated a lot of our concerns, and also solidified our trust in the founders’ judgment and decision-making. Knowing that a professional CEO would be running the company-and that the founders were wise enough to make such a decision-made us all the more eager to invest in WebPT’s future.
When you’re looking to get funded, the investor pitch is always important. In WebPT’s pitch, the founders stressed the ease of use of their software and offered a live demo. We were impressed by the technology, and even more so by the intuitive nature of the product. While many software solutions are cumbersome to implement and intimidating to learn, the rehabilitation professionals using WebPT were able to pick it up quickly and understand how to use it in one or two hours. They could also access it from their iPads, which meant easy accessibility of the system while on the job.
We also loved the fact that cofounder Heidi Jannenga practiced as a physical therapist for many years, and actually knew the pain that WebPT’s target users were facing. She was experienced in the field, and still had the ear of the industry. This spoke to the credibility of the product and its founders-important factors to investors.
With all the pieces in place, it was clear that WebPT was more than deserving of our funding, and we were excited to offer it. Even after we made our decision, we continued to watch out for signs that pointed to nearly limitless potential for the company-healthcare reform and the move towards value-based care created the perfect storm of opportunity. We also could get behind their vision and company culture, which valued a casual atmosphere, a strong set of core values, and a horizontal hierarchy-everyone had a voice in the company. All of this made it not only a fun place to be around, but also a prudent investment since a compelling culture makes recruiting top talent much easier.
Choosing to invest is a very calculated move, and you can bank on any potential investor looking into all corners of your business. So take a note out of WebPT’s book-demonstrate repeatable, sustainable growth, smart leadership, market potential, and a solid company culture-and you could be on your way to landing that investment.
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