VC investing in companies for which I’m not the end customer

Written by: Yuval Tamir

How the 5P investment framework helps Chingona Ventures invest in new verticals and reduce biases.

Chingona Ventures is an industry agnostic fund, and as such, we see a lot of companies in verticals we don’t have expertise in. Sometimes, we may want to pass on an opportunity if we can’t understand what customer pain point the company is trying to solve. But are we passing because this is not an important problem to solve, or because we are not the end customers of the product and we just don’t get it?

Some people ask me, how do you invest in a company for which you are not the end consumer? To answer that question, I will walk you through the framework we use at Chingona Ventures to help us remove biases. I’ll start with a recent example.

True Story — Male investing in FemTech

I was recently looking at the inbound deal flow funnel to identify potential opportunities for investment. One startup caught my eye — the company had early traction, which seemed pretty good for a bootstrapped pre-seed startup (100 paying customers in their beta). As I read more about the company, I realized it is a FemTech startup that helps women with female healthcare. As a man, the first thought was “I’m not sure I qualify to assess this opportunity”. However, as an Associate in an industry agnostic fund, I have to be able to assess companies for which I am not the end consumer. Therefore, I took the challenge and decided to take the first meeting. One might ask how can a person who has never experienced this female healthcare problem assess the opportunity and actually understand whether this is a good investment? I felt confident going into the meeting thanks to Chingona’s investment framework — the 5Ps.

The 5Ps — an opportunity assessment framework

The 5Ps is a framework used at Chingona Ventures to assess startups in our first meeting. (and yes, I’m sharing it because I want founders to know how they are being assessed, so that they can bring their best self to the meeting).

The 5Ps are: People, Product, Profit, Potential, Portfolio. Let me elaborate:

• People: We invest in badass founders. There are three archetypes of founders that we like: (1) The Expert holds a background or experience that exceptionally prepares her/him to take this idea to market. The founder may or may not have entrepreneurial experience. This founder has impressive Founder-Market fit; (2) The Experienced Founder founded 2–3 companies already and has demonstrated entrepreneurial qualities regardless of background; and (3) The Non-Traditional Founder is a first-time founder with little to no experience in entrepreneurship. However, s/he demonstrates grit and deep knowledge of the industry. We like founders who, even at a pre-seed stage, show grit, scrappiness, capital efficiency, and take action. We like doers, not dreamers.
• Product: We like to see early signals of product-market fit. It’s OK to be pre-product, as long as you show that you fully understand the problem you are trying to solve, as well as have data to prove that people really need that problem solved and are willing to pay for it. In other words, we are looking for Problem-Market fit. It’s always great to have an MVP launched (bootstrapping is a signal of capital efficiency), but it’s more important to show customer retention for the MVP and customer willingness to pay you. If you’re pre-product, we like to see other forms of validation such as waitlists, social media engagement, or a respectable sales pipeline.
• Profit: We don’t expect a lot of revenue at the early stage we invest in, but we do expect a feasible business plan that indicates a path to monetization. We like companies generating revenue — even if it’s $1 for a beta product, it demonstrates customers’ appetite for your solution. If they have a longer-term vision by which they will have another monetization avenue in the future, that’s fine, as long as they are focused on proving the initial model by which they will make money. We like to make sure the business economics make sense (LTV, CAC, and other unit economic metrics), and we like to see capital efficiency, as indicated by what you’ve achieved with very little to no money raised or spent on paid marketing.
• Potential: This is where things like market size, market growth trends, competitive landscape, funding, downstream capital, and exits in this space come in. In the first meeting, we want to make sure the market for your startup is large enough (or if it’s not large today, can you quickly take market share and expand into other verticals), that you have a competitive edge in the market, and that your business is scalable. These criteria essentially answer the question “is this business venture backable”.
• Portfolio: While we are industry agnostic and have invested in enterprise sales software as well as a D2C sexual wellness company, we do have a few verticals in which we have developed an expertise. These include FinTech, FemTech, FoodTech, EdTech, Health and Wellness, and Future of Work. We try to focus on these because we want to make sure we can help the startup hit their milestones. However, we’re always open to investing outside our core verticals when we see an idea disrupting an industry that is overlooked or stagnant. Especially if the startup is great on the 4 other Ps.

Benefits of the 5Ps

We use the 5Ps at Chingona because of three key benefits: Simplicity, Consistency, and Removing Bias.

• Simplicity: The 5Ps is a simple framework. It’s amazing how easy it is to get a clear picture of an investment opportunity when the framework is not overly complicated. It’s also very easy to answer the 5Ps by simply listening to the founding story and asking a few follow-up questions. In 30 minutes, we get a solid understanding of a startup.
• Consistency across opportunities: With a simple framework, we assess all opportunities in the same fashion and ensure we have consistency in our decision making, no matter which team member took the first meeting.
• Removing bias: The 5Ps helps remove bias by ensuring we ask the same questions to founders early on. Studies show that women and men get asked different questions during investor meetings. We all have biases and they come to light especially in early stage companies since there isn’t much data to go off of.

Using the 5Ps as a Male investing in FemTech

Going back to my example, I decided to meet the founder of the FemTech company. At the meeting, I met a founder who legitimately impressed me. It didn’t matter that I didn’t fully understand the problem she was trying to solve. What mattered was that she understands the problem, she knows her target customer segment, she has very good traction for an early-stage startup, and she answered all of the questions in our 5P framework. I decided to move forward with this company, and we are currently doing our diligence to make our final decision. I did not have to be female to recognize the potential of this founder or the potential of this business. I was able to see the potential thanks to the 5Ps.

Final thoughts

A lot of investors dismiss ideas as “I would never use that” or “that doesn’t sound like a problem that needs solving”. But the truth is that most investors are not the end-users of the products of the companies they invest in. The 5P framework helps us remove biases, and focus on the fundamental value of the startup.