What is the bottom-up approach for identifying startups for your portfolio?

Here's an example of the bottom-up approach -- that's how we source 80% of our portfolio. Every year we go to our global community of 500,000 product managers and we say, ‘Please nominate the products that make your work and life easier.’ For 2024, we have already received 6,000 nominations, so that's 6,000 companies that are doing something that’s interesting to product managers. Every quarter we publish what we call the Product Guide, which is a trend report on innovation based on all those nominations that informs our investment thesis. Then, of course, we take these 6,000 companies and we look at them one by one, and we say, ‘could this be a great investment for Mighty Capital?’

Every quarter, we boil the entire industry vertical ecosystem and map for white spaces set for hyper growth. We then map where to play, how to win, what to build / invest in, and what governance. We then proactively outreach to our targets. While we do see an extraordinary number of deals at R3i, and we do consider all incoming into our dealflow at the front of the funnel, we are not chasing hundreds of thousands of applicants, the data delivers that - instead we want those founders whose companies we have identified whom we call, to want to pick up the phone because they know we will add killer value to their commercialization, capitalization, + R&D agenda and they want us on the cap table. We have supported 485 MBAs/EMBAs in this process.

Understanding different approaches is the key here, because without it, you will not go anywhere in startup or business analysis world

From my opinion, like focusing on bricks instead of architecture. Year-to-date, a 'top-down meets bottom-up' technique is preferred. Here, macro trends and sector research are as important as startup KPIs. Understanding both the forest and the trees. Why? Because global trends and sector developments might affect a startup's prospects. Imagine assessing a renewable energy firm only on its financials without considering the global green movement. Or assessing a tech startup without considering digital transformation. The new motto is 'Context is King' The startup's internal dynamics and how it fits into and may change the bigger puzzle are important. Expand our view—the next big item may be unexpected!

Moreover, consider the startup's potential for innovation. Beyond their current value proposition and market fit, evaluate their capacity for ongoing innovation and scaling in a rapidly changing environment. This approach gives a more comprehensive understanding of a startup's resilience and future growth potential, crucial for a sustainable portfolio.

The bottoms-up approach focuses on the micro first, then macro and it is quite different from the top down approach that focuses on the macro first!

Top-down, macro-level thinking is like reading a book by its cover. It may oversimplify the robust startup ecosystem. The trend is to combine micro and macro perspectives. Using broad market trends can blind us to emerging companies in industries. Like fishing with a wide net, it catches everything but the best. The industry is adopting agile, nuanced methods. Think of it as'strategic serendipity'—being open to unexpected jewels that may not fit the industry model but have innovative potential. In dynamic startups, outliers can shift the game. The expression goes, 'Not all who wander are lost.' This strategy involves purposeful wandering for innovation that transcends trends. Combine top-down and ground-level wisdom for a complete picture.

Also, integrate a sustainability and social impact perspective. In today's evolving market, startups that align with sustainable practices and social responsibility often have a competitive edge. Analyze how startups contribute to or align with broader societal and environmental goals.

Our fund, Aperture VC, believes in the validity of both the top-down and bottom-up approaches to investment selection. The latter has clear benefits that stem from analyzing actual performance data from operations, as well as detailed customer &market feedback. The granular understanding- of founder/team vision, sales dynamics, scaling potential & competitive pressures - you get from bottom-up analyses is an invaluable tool for building a top performing portfolio of early stage equity investments. It’s worth noting that the deep knowledge of founder/team functions you get from this approach adds a human element to the resulting investment memorandum that is as powerful as it is persuasive.

Current trends combine meticulousness with mobility and broader perspective. Integrating depth and breadth is key. Putting together a jigsaw puzzle without seeing the box picture is like focusing on individual businesses. You get a detailed look at each item, yet you may miss their context. This year's theme is'selective depth within strategic breadth' The bottom-up strategy works best for uncovering unique, disruptive startup potentials, but market dynamics and industry synergy must be considered. Remember that investing in a startup is about its future in business and innovation. Let's both look via the microscope and telescope! Always learn and move!

Pay special attention to startups that are offering innovative solutions or addressing unmet needs in the market. This can be a strong indicator of potential for growth and success

Our fund - Aperture VC - is one of the only debut funds to have attempted a different, more ambitious kind of bottom-up approach to investment selection: incubation. For the last 18 months we collaborated closely with an AI management consulting group that developed powerful intellectual property in the fair lending and algorithmic debiasing space. We helped them select a customer pain point for banks and credit unions, conduct extensive customer discovery and then used this to formulate GTM. To complete this incubation process, we agreed to be lead investor in their first outside financing and also created a syndicate of leading fintech and InsureTech co-investors.

The bottom-up approach in venture capital is detail-oriented. Enhance it by aligning with broader market trends from the top-down perspective. This balances micro-level potential with macro-level viability. Leverage technological tools for efficient research and analysis, focusing on startups' scalability and adaptability in evolving markets. Utilize industry networks for deeper insights and validation. Consider startups' sustainability and ethical implications. These factors are increasingly important in today's investment climate, adding long-term value to the portfolio.