Over the years, I’ve seen a bunch of ways to screen a venture capital portfolio looking for insights into risk, return, capital allocation, and areas of concern. I posted about one of them last week I call the Survival Matrix and people seemed to like that one so I’ve got another one for you this morning.
The Survival Matrix is all about risk, particularly financing risk, in your portfolio. It allows you to easily identify the companies that are going to have near term financing issues.
I call this next one the Portfolio Maturation screen. You plot annual revenues on the y-axis and a subjective measure of "traction" on the x-axis. It’s tempting to be overly quantitative with the x-axis and I urge you to avoid doing that. Just pick a numerical score for each company (1 to 30) that gives you some sense of how well they are doing in their attempts to scale into their market opportunity. If the company is a consumer facing web service, then uvs per month would be a good metric to think about. If the company is an ad network, then the amount of inventory they control would be a good metric. If the company is a enterprise oriented web service, then number of customers or channel partners or market share would be a good metric.
Here’s what it looks like (again this a set of make believe companies and does not reflect our portfolio or any portfolio I am aware of).
The size of the balls represents how much is invested in each company.
What you want to see (of course) is the balls move up and to the right over time. And you want to see them start out small and get bigger as they move up and to the right.
I’ve seen companies get to the up and right location different ways. You can move up in a straight line by adding revenues in parallel with scaling into your market. That’s the most typical way to grow.
Or like the light blue/green ball, you can move out on the x-axis agressively acquiring customers without generating revenues and then once you’ve reached critical mass, you can turn on the revenue engine and move into the desired location.
You can also scale along the revenue line first, like the orange and purple balls, and then try to gain traction. In my experience, this is the safest way to grow a business but also the hardest move to make. For whatever reason, a lot of balls get stuck in the upper left of this chart.
What you don’t want to see is the lavender ball stuck at no traction and no revenue and growing bigger and bigger. That’s a troubled company and you need to either figure out how to help them or find a way to get them out of the portfolio.
The other great thing about this screen is it shows if you are scaling capital into your best companies. We like to start with a very small ball and grow it over time as the company develops its business. If the balls are too big on the lower left of this chart or too small on the upper right, then we are not doing a good job of capital allocation and that’s a problem.
I hope you like this screen. Let me know what you think about it in the comments please.