How one of Europe’s best-known venture capital teams selects its opportunities
Simon King is a fund manager at Octopus Ventures. He explains the team’s approach to investing in early-stage companies and how they spot potential winners.
There’s an old adage in venture capital investing.
“Invest in class A teams with class B ideas, and never the other way around.”
When Netflix was founded in the 90s, it wasn’t the streaming service we know today, but a DVD rental company by mail. PayPal started life as Confinity, a company developing security software. Slack, used in offices around the world, was a byproduct of a failed video game.
You get the picture.
Few successful companies end up doing exactly what they set out to do. So when you invest in a start-up business, you should expect that they won’t be selling the exact same thing by the time they find success.
Things are changing. Challenges are met. New opportunities arise.
As a venture capital team, you have to be open to that. You invest in fantastic management teams and help them succeed. It always comes down to the team. The ability to sell is essential – sell a product to potential customers and sell a vision to employees and investors, the people who part with money to help achieve that vision.
Have the vision
There are a few simple market factors that we need to see before investing in any business. A large addressable market is essential. Usually this will be a market valued at over £1 billion. The business must also be able to grow rapidly in a relatively short period of time and have a good chance of expanding into new markets or crowding out incumbents to meet the investment criteria.
We will also seek competitive advantage, usually in the form of significant intellectual property.
Beyond that, Octopus Ventures tries to see opportunities that have been overlooked. A fundamental part of this is valuing the diversity of backgrounds within the investment team. You need a diversity of opinions when evaluating start-ups. A team with a tunnel vision simply cannot assess opportunities. Take Elvie, for example, a company Octopus has invested in that has great potential. It designs and manufactures health technologies for women, such as a silent portable breast pump. Many investors did not see the opportunity, considering the area taboo.
In fact, Elvie had a fantastic opportunity to tap into a huge underserved market that had been overlooked by big pharma.
Hiring from diverse backgrounds and creating a culture of openness gives you a better chance of spotting these kinds of opportunities.
Venture capital teams then need to be able to sell portfolio companies that may have reached a value of hundreds of millions or even billions. Octopus Ventures’ network and reputation in acquisitions enables them to ensure the best exits for companies, founders and, ultimately, investors. Although it is important to remember that venture capital investing is high risk and not all businesses will be successful.