What Do Early-Stage Investors Look For? An Interview With Carmen Rico

Carmen Rico is a venture capitalist turned Angel at Cocoa, an angel fund backed by tech founders that invests angel cheques into European pre-seed and seed companies and then becomes the in-house VC for founders. Previously, she was a Partner at the Series A fund Blossom and an active angel with more than 20 investments. She was also the first investor at Hopin, which she’s credited with having syndicated 100 percent of its pre-seed round in September 2019. 

Carmen will be speaking on a panel at The Marketplace Conference in Berlin on October 11th. In her session, she will discuss what early stage investors look for in marketplaces. Carmen was kind enough to give me a sneak peak on what to expect in this session and offers founders a few tips on what gets her attention the most when scouting for startups.

Listen to our full interview or read the highlights from our chat below.

(This interview was lightly edited for clarity and brevity.)

What would you say is the most common characteristic across companies you’ve invested in that convinced you to back them at such an early stage?

I would say that the most common characteristic across all the companies I have backed to date is what I call ‘insane customer love.’ 

The basic idea is that if your customers love your products so much that they gather around it, build a community, interact in and engage with it, and bring others on board, this is a strong driver for organic growth and a very high barrier for entry. These customers have almost an emotional connection with the product. And so for me, this can be interpreted as excruciating pain points that people can't live with and solutions they cannot live without, leading to a highly scalable and defensible business when combined with network effects. 

Related Reading: Acing Your Marketplace Fundraise: Pre-Seed

What are the key KPIs and metrics you focus on when evaluating marketplaces?

There is an ongoing theory that for a marketplace to work there needs to be fragmentation of demand and/or supply, meaning that no single entity on the demand or supply side has an overly influential position. 

While this is true, I personally prefer looking at marketplace liquidity, which is the efficiency at which the platform matches supply and demand. This gives an indication of the depth of the market and is a critical indicator when considering how successful the marketplace is.

There are actually many more metrics I can list, but if I were to choose one that I am obsessed with and that founders should focus on, it would be the share of wallet. This measures how much of an existing customer’s total business––whether supplier or buyer––is captured on the platform. For sellers, this is the proportion of revenues earned from the marketplace. And for buyers, it’s the proportion of spend carried out on the marketplace. The higher the share of wallet of a given buyer/supplier captured by the marketplace, the more critical the marketplace to that given buyer/supplier.

The final KPI that should be monitored by founders as they build a marketplace are cohorts, which give an indication of the engagement and retention of buyers and sellers. Oftentimes, founders aggregate marketplace participants as opposed to looking at them as specific groups (by month or quarter), the former of which can misrepresent their actual behavior over time. Cohort analysis is key to understanding how much a marketplace is meeting the needs of the participants on its platform.

Related Reading: Acing Your Marketplace Fundraise: Seed

In making early stage bets, different investors over-index on different things. For some, it’s the product. For others it’s metrics or the team. What’s yours?

For me, it’s all about the founders. Founders are basically my thesis. The question then is, what do I look for in founders? Everybody talks about founder-market fit and this is key. What I look for in founders is obsession––obsession with the problem they are solving. Usually this stems from being an insider and living and breathing the problem themselves. It not only gives them an edge and insight into the market, but more importantly, a real will to solve it as they have felt the pain firsthand. It’s personal.

Alongside obsession with the problem, the other thing I look for in founders is an ambition that is borderline naive––a world where nothing is impossible and all they see is the reality of what they are trying to create. This leads me to the final quality I look for: The ability to execute. 

Launching a startup is somewhat irrational. There are a myriad of things that could go wrong and founders are often tempted to give up. However, this combination of obsession and ‘naive’ ambition, supported by continuous execution, births category defining companies, ones that influence the way we live, work, and play.

Related Reading: Acing Your Marketplace Fundraise: Series A

What parting thoughts would you give to founders as they launch and build their companies?

There is no right way to build a marketplace. Some companies launched SaaS first and then built a marketplace while others have built a marketplace and a SaaS later. When you look at a number of the leading tech companies and compare them with the initial vision and the go-to-market strategy of the founding team, many have developed in a way that no one could have envisaged. 

Solve a problem first. Find that Trojan horse that gets you into a segment. Create product-market fit, then execute the playbook, and scale, after that more opportunities will come.

Finally, from my own experience, focus on your superpowers and lean into them. And most importantly, have fun!

Marketplace Conference 2022

Want to hear more from Carmen on how to ensure you are investment ready when you pitch? Join us at The Marketplace Conference and come and listen to her panel on ‘What Early Stage Investors Are Looking For’ LIVE in Berlin on October 11th at 14:00 CET.