HOW WE EVALUATE INVESTMENT OPPORTUNITIES - THE FOODS FRAMEWORK
By: Rafaella Fontes, MBA Fellow, Supply Change Capital | 10/4/2021
October 4, 2021
How do VCs evaluate deals? What exactly is considered when a team determines whether or not to take a deeper look at a potential investment opportunity? We strive for transparency and robust processes, so we developed the FOODS framework to guide our intake work. This reflects our approach to evaluating the incredible food and food tech deals coming across our plate. Supply Change Capital’s MBA Fellow Rafaella Fontes shares the approach.
What is FOODS?
Supply Change Capital invests in the changing face of food. As we build our firm, we are building processes that will allow our team to evaluate an opportunity and its alignment to our fund thesis while recognizing -- and minimizing -- bias. To do this, we use the FOODS framework: Founding Team; Opportunity; Operations; Dynamics; Sustainability. We are sharing it here because we want it to be transparent to any founders who join us in the journey (share your business with us here).
Why is it important to have a deal evaluation framework?
The work of a venture capital investor requires evaluating dozens of opportunities weekly, if not daily. Processing and making sense of the hundreds of data points with varying degrees of ambiguity leads to a sort of information overload the brain sorts by relying on personal heuristics, often termed “pattern matching”.
Relying on this unconscious habit results in biased investing decisions, evidenced by the mirror reflection of the demographics of those with capital and those who have received the most of it in the past decade. For example, fewer than ten funds, (of about 2,000 active US firms) — or 0.4% — are led by Latinas. Correspondingly only 0.4% Latina founders received Venture Capital funding.
Further research has found that while investor’s confidence increases with more information, the accuracy of the decision actually decreases. The purpose of this evaluation framework is to equalize the playing field and evaluate each company based on the same dimensions, irrespective of our own personal backgrounds.
How our framework allows us to intelligently invest
The FOODS framework combines qualitative and quantitative ratings to give as holistic a picture as possible of the investment opportunity and the founder that we are evaluating. All five categories are rated on a scale of 1-4 and given a qualitative description. It is not a perfect system, but it facilitates conversation among the team more easily when both qualitative and quantitative information can be shared and discussed.
We recognize that data collected by humans will always incorporate an element of bias, but we believe data has the ability to showcase systemic bias. At the pre-seed and seed investment stages, there is not often substantial performance data. Relying only on revenue and traction, for example, may alienate founders who do not have family and friends with as much disposable income to have funded early prototyping stages.
FOUNDING TEAM
We put our first bet on the founding team. Ultimately, we know we could be engaging in a ten year relationship. We think about how the founder and team are uniquely suited to address the opportunity they put before us. How has a founder’s past experiences translated into the mission they have for this company? We look for congruence in founders who can clearly articulate both their past lessons learned and how they plan on applying and developing those skills in this endeavor.
We are also committed to investing in diverse founders and teams. There is a well documented funding gap in founder demographics. In 2019, only 3% of dollars invested in food and agricultural technology went to women; while nonwhite founders received 1% of VC funding. We invest in the changing face of food to meet the US market where it is going, to find alpha, and to make impact in the food system.
OPPORTUNITY
Opportunity refers to the dynamics of the current environment. The two big questions we focus on are ‘why now’ and ‘why us.’ We are betting on companies that have a strong reason to be in the market now, would benefit uniquely from our backing, and fit into our fund model. Some of the questions we consider:
Why is this an opportunity that should be addressed now?
Is this a major innovation, something truly novel, or a 10x improvement on existing technology or solutions?
What is the market size (total and attainable) that this solution can address?
These questions matter because venture capital is a unique kind of investing strategy. We want to ensure that venture financing is the right strategy for this company’s growth predicated on a pivotal inflection point in the near future.
OPERATIONS
For SCC, operations means the systems, people, technology and processes the business needs to function. We look for businesses with scalable operations and humble founders that know they need great teams surrounding them to grow. How founders build supply chain resiliency and equitable systems matter. Once we get a better understanding of how the company runs, we look to ensure the processes contribute to building a better environment for human and climate health.
While we want to discuss the business model and any demonstrated traction, we want to understand the business in its entirety. Great ideas need greater operational support and planning in order to be executed successfully.
DYNAMICS
This touches on the economics of the raise and general fund fit. We will invest in about five companies per year out of 1,000 that come through the pipeline. There are three essential elements that matter here.
First is the timing of the investment opportunity. We can move quickly on an investment, but have generally preferred having the time to get to know founders, and vice-versa. Second, deal economics is important for us. We want to understand the founder’s intention with the fundraise, as we want the founding team to be set up for success as they grow their business, and when they raise a Series A. Finally, we are mission driven and look for thesis-fit for our investments. We look for companies in the following verticals: technology focused on enabling better food systems, culturally relevant brands, and sustainable ingredient technology.
SUSTAINABILITY
We evaluate investment opportunities along three impact dimensions: sustainability, diversity, and health. We developed a framework for impact analysis to be applied at the onset that is simple and provides valuable insights, ensuring that our investments are aligned with our thesis and our view of the future of food: sustainability mindful, supply chain efficient, better for you, and culture rich.
HOW WE USE FOODS
We use the FOODS framework as a screening criteria for deals, and as a benchmark for all of our investments. It is the guiding framework that we use throughout the deal flow evaluation process, and it is foundational to making our investment decision.
If you are a founder and would like to be considered by Supply Change Capital, please share your business with us here.