Friendly Disclaimer: In the spirit of making rational decisions (one of our key company values), Archetype uses a proprietary scoring system to evaluate venture opportunities. While we can’t disclose the whole secret sauce recipe, we wanted to share some of the factors that may not be as immediately apparent.
Archetype Solutions Group differentiates itself by building ventures, allowing us to develop a much deeper understanding of our partners’ businesses and have a wider breadth of operational experience than through consulting engagements alone. When entering into ventures, our due diligence not only assesses for risk, but also strives to deeply understand our potential partners and ensure a mutually beneficial relationship.
Here’s a selection of our considerations when entering into ventures:
- Compelling product
- Market saturation
- Growth stage
- Concentration risk
- Regulatory risk
- Access to pilot and test customers within ASG’s network
A major component of our due diligence process is getting hands on experience with the products and services our ventures offer. As consumers ourselves, we often ask, “Would we use this product?” If the answer is no, it’s important to understand why – are we missing something, or does the product simply not have good market fit? Having deep relationships in our industry helps us triangulate for latent needs that are not currently being met.
Instead of competing against larger companies who may be more established or have national distribution, smaller, local providers have an opportunity to build products FOR those companies. Selling efficiency-boosting or value-add solutions is a prime opportunity for high growth. For example, the market for traditional corporate wellness vendors is extremely saturated with consolidated, national vendors at the top of the market and numerous, local providers in the SMB space. We’re much more interested in investing in products and services that can enhance the offerings or streamline the operations of all of these vendors in scalable, technology-enabled ways.
In early-stage companies, a strong team is absolutely critical to success. While previous experience running businesses is often valuable, we find it’s not always necessary. We’ve found it’s more essential to have leaders who are deeply committed to the success of the company, are able to effectively manage others, understand the industry at a fundamental level, and can react to changing conditions. This doesn’t always have to be a single individual. Often leadership teams with complementary skillsets can be the best way to manage a start-up. Making sure that any venture we invest in has a strong, capable team is one of the most important parts of our job.
Archetype aims to partner with ventures that are ready to accelerate their growth leveraging our capital, resources, and network. Finding companies at or near inflection points in their growth is key to maximizing returns with limited resources. In our experience, initial traction and revenue growth are key indicators of imminent success. We’ve engaged with companies of many sizes at many different stages and have determined that our impact is maximized when we’re working with companies that have:
- An established proof-of-concept
- Strong evidence of market demand
Our sales acceleration process is designed to super-charge growth by streamlining the sales process and rapidly expanding the top-of-funnel for maximized opportunity.
A component that can be easily missed when evaluating an opportunity is concentration risk—essentially how much of a company’s revenue comes from a single or a small number of customers. Every business is going to experience some degree of churn, but when losing a single relationship can jeopardize a significant portion of the revenue, the valuation should usually be scaled back from traditional EBITA or revenue multiples. Unfortunately, there is somewhat of a Catch-22: often the answer to concentration risk is further growth and acquiring additional customers, and this can be difficult without adequate resources. It’s important to take a balanced approach to concentration risk and adjust valuations appropriately while not abandoning promising opportunities.
When making investment decisions, it’s not only current policy that matters, but also future changes that can dramatically impact a business model. A robust investment strategy needs to account for the likelihood and potential severity of these regulatory changes. Since much of our work relates to healthcare and healthcare adjacent industries, HIPAA and other data security requirements are always a major concern, in addition to state-by-state regulations and changing federal policy.
Access to pilot and test customers within ASG’s network
Archetype drives innovation through two key strategies – real market data and rapid, continuous iteration. Having an existing partner who is co-invested in creating impactful solutions can dramatically accelerate the feedback and evolution of the product we’re building together. The venture gets easily accessible, reliable, useful feedback, while the end user can play a key role in ensuring the product solves for their pain points in a meaningful way. If a company we’re considering a venture with already plays in our network, we view that as a strength.
Why we believe in our approach
There’s a multitude of reasons that this approach drives success. Partnering with companies that have expertise in a given market means we’re already several hundred yards past the starting line where a standalone startup would stand. The partnerships we provide have amazing intellectual property that has been honed over years of experience and/or deep customer understanding and relationships to drive both product development and distributions. Our ventures focus on redeploying that intellectual property in alternate forms in new or existing markets and addressing the needs of existing customer bases through the deployment of new product(s). Archetype’s participation in the partnership brings insight, structures, and network connections built through our consulting and venture experience that uniquely enable us to navigate the venture development process.