Navigating the choppy waters of startup investments is a complex dance, balancing potential with realism, innovation with pragmatism,

Navigating the choppy waters of startup investments is a complex dance, balancing potential with realism, innovation with pragmatism, and ambition with grounded experience.

There are multiple schools of thought on the best way to achieve this balance. Some VCs aim for a very high number of investments to counter the large variance in outcomes. Others adopt a sector or thesis-driven approach to a specific subset of companies. Our formula is being very selective within our home turf – technology companies building differentiated products from Southeast Europe (SEE). So far, this approach has helped us achieve 4 exits in 4 years and partner with many more exceptional founders.

But what does selective mean and what are we actually looking for? Here are a few insights into how we think when investing in startups, based on a conversation with Georgi Mitov, Managing Partner at BrightCap Ventures.

Early Connections and Founder-Investor Fit

At BrightCap Ventures (BCV), we establish early connections with founders. Recognizing that investing in a startup is a long-term engagement, the fit between founders and investors is vital to us.

We aim to find a match with founders not only in terms of their ideas but also in terms of their personalities and mindset. If we identify some potential red flags in a founder’s personality and have no success addressing them, we won’t invest regardless of the appeal of their idea.

Execution-driven, down-to-earth entrepreneurs who are knowledgeable about what they say are the ones that appeal the most to us.

We value execution bias above all else, as, in the startup world, the idea itself only constitutes a small percentage of the success of the company in the long-term. It’s the execution that makes great founders stand out. But execution is not sexy, and often overlooked, which is why we look for a proven track record and proof that founders are indeed able to deliver, learn from the market and rapidly readjust when something isn’t working.

Founders’ honesty and transparency are other key traits we look for. We believe our entrepreneurial backgrounds help us listen empathetically, as well as identify and address the challenges and opportunities our portfolio companies face. On top of that, we often reach out to our extensive network of industry experts which help us validate the problem, competitive landscape and the opportunity through the lens of industry-insiders. Such validation (if successful) can be the base to establish a relationship between the startup and a potential enterprise customer.

Identifying the Problem

The first thing we look for when we establish a relationship with a new company is whether founders can quickly identify and articulate the problem their product solves. It’s crucial they understand how big and painful the problem is, who experiences it, what alternatives exist, and why there isn’t yet a good alternative. Too often, founders talk directly about solutions, which is a mistake. It suggests they are offering something without knowing whether there’s a demand for it.

Product Differentiation and Defensibility

Theoretically, perfect product defensibility doesn’t exist – any software could be replicated with limitless human capital and resources. What we search for is the practical uniqueness of a start-up’s product.
Founders should show why and how they’re different, how they meet user and market needs in a distinct way, and why they are hard to copy.

Based on our experience as tech entrepreneurs, we dive deeper into the startup’s technology and assess the uniqueness of the IP developed by the team. While we encourage our founders to be resourceful and build something out of nothing, a startup built solely on someone else’s technology becomes problematic for long-term defensibility.

For example, if you’re building an AI summarization software based on ChatGPT and the entire workflow is linked with Zapier with a few custom automation scripts, this setup can work well, but it’s not a proprietary IP that can be protected. Essentially, anyone could replicate it. This is one of the primary red flags for us, and usually, where we lose interest in the company.

Barriers to Entry and Unfair Advantage

Building on top of product differentiation, we are always curious to understand if the founders have an unfair advantage which gives them a notable head start or adds to their defensibility. Often, this is a unique piece of IP, but the unfair advantage could come in other forms, including the team’s synergy and unique background knowledge, access to proprietary data (for example, from a factory, hospital), or industry relationships that are challenging to build without inside connections.

The Team

We already touched on the founder-investor fit, but there’s more to founders than their background and skills. Their ability to attract and build a world-class team is what really propels companies to venture scale.

We are always impressed by founders who manage to inspire early team members with a mission and go beyond just the transactional means to bring them along for the journey. The team construction can massively vary based on the stage and vertical of the company, but the simple question we ask ourselves before making a decision is: ‘Can this team build the product, sell it and continue scaling and evolving in the long term?’

Market Evaluation and Go-to-Market Strategy

Another essential element is how startups will reach their target customers, i.e., how they will build marketing and sales channels and how these channels will function. For example, if a founder claims to attract 1000 customers in the first year, it’s key to explain how these people and many more will learn about the startup’s solution or that they even have a problem in the first place.

A significant number of founders miscalculate their market size, often speculating with inflated numbers in the range of billions of dollars. This is a mistaken belief that showcasing a vast market is the key to attracting VCs. In reality, early-stage startups are often still validating their market, and there’s a high likelihood that their actual market differs from their initial perception. While it’s beneficial to have a vision for the bigger picture, it’s far more effective to demonstrate a clear beachhead market and go-to-market strategy for winning the first 10, 100, or 1,000 customers.

Realistic Competitor Analysis

One of the most common errors we encounter in a pitch deck is a flawed competitor landscape slide. There are usually two variations: a quadrant where the startup is positioned top right and everyone else falls middle-left, or a table with green checks across the board for the startup and gaping holes for everyone else.

Our advice to founders is to be honest about their competitors’ advantages. If the competitors didn’t have merits, they wouldn’t be competitors – people use their products for a reason. It’s far better to focus on how you’ll differentiate from the competition and how you plan to take market share in both the short and long run.

So, how can you meet us?

Besides intros from common connections, founders can also meet us in person at events – a face-to-face meeting dramatically improves the odds for follow-up on other channels later on. Being creative also scores points in our books.

Our investment process may sound like a lot but it’s important to emphasize that this is not a box-ticking competition, but a two-sided relationship which evolves with time. It’s rare that founders will have undisputable answers to each question we have so it’s always best to engage early and start the conversation ahead of a formal fundraise.

Once a company becomes part of our portfolio, it can leverage our full team’s network and knowledge. Being selective ahead of investing underscores our commitment to building a portfolio of high-potential, high-impact companies.