How do you select the best portfolio companies?

1 1. Market size and potential

One of the first things you should look for in a portfolio company is the size and potential of its target market. You want to invest in startups that are addressing large and growing markets with significant demand and opportunities. A good way to assess market size and potential is to use the TAM, SAM, and SOM framework. TAM stands for total addressable market, which is the total revenue opportunity for the product or service. SAM stands for serviceable available market, which is the portion of the TAM that the startup can realistically reach. SOM stands for serviceable obtainable market, which is the share of the SAM that the startup can capture. By using these metrics, you can estimate the market opportunity and growth potential for each portfolio company.

2 2. Team quality and fit

Another important factor to consider in a portfolio company is the quality and fit of its team. You want to invest in startups that have a strong and diverse team of founders, managers, and employees who have the relevant skills, experience, and vision to execute their strategy and overcome challenges. A good way to evaluate team quality and fit is to look at the team's background, track record, network, culture, and alignment. You should also assess how well the team fits with your own values, goals, and expectations as an investor. You want to build a trusting and collaborative relationship with the portfolio company's team and support them throughout their journey.

3 3. Product-market fit and traction

A third factor to look for in a portfolio company is the product-market fit and traction. You want to invest in startups that have a clear and compelling value proposition that solves a real and urgent problem for their customers. You also want to see evidence that the startup has validated its product-market fit and traction by acquiring and retaining customers, generating revenue, and achieving positive feedback and referrals. A good way to measure product-market fit and traction is to use the lean startup methodology, which involves testing hypotheses, iterating based on feedback, and measuring key performance indicators (KPIs) such as customer acquisition cost, lifetime value, churn rate, and net promoter score.

4 4. Competitive advantage and differentiation

A fourth factor to consider in a portfolio company is the competitive advantage and differentiation. You want to invest in startups that have a unique and defensible edge over their competitors and can sustain their advantage over time. You also want to see how the startup differentiates itself from other players in the market by offering superior features, benefits, and experiences to its customers. A good way to assess competitive advantage and differentiation is to use the SWOT analysis, which examines the startup's strengths, weaknesses, opportunities, and threats. You should also compare the startup's value proposition, business model, and innovation strategy with those of its competitors and identify any gaps or opportunities.

6 6. Portfolio fit and diversification

A final factor to consider in a portfolio company is the portfolio fit and diversification. You want to invest in startups that complement and enhance your existing portfolio and help you achieve your investment objectives and risk-return profile. You also want to diversify your portfolio across different sectors, stages, geographies, and types of startups to reduce your exposure to market volatility and increase your chances of finding winners. A good way to determine portfolio fit and diversification is to use the portfolio matrix, which classifies your portfolio companies based on their growth potential and risk level. You should also monitor and adjust your portfolio allocation and performance over time and seek new opportunities to diversify and optimize your portfolio.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?