Startup selection, agility, performance and trust

There has been plenty of discussion about the startup performance. One stream of such discussion relates to the selection of good startups and methods used for such selection. In my opinion there is a need for a combination of several different tools, including the heuristic analysis of the startup and its market potential, action driven cash flow models as well as portfolio risk analysis models.

Heuristic analysis should be useful because the traditional economic forecasting models cannot accurately predict the performance of a single startup due to many unknown factors in play. Action driven cash flow models help to understand the business model and market dynamics, and to identify the key metrics, customer conversion funnel as well as pin point the conversion problem areas once invested early on. From the portfolio point of view it is important to maximize the exposure to non-capped upside, i.e. positive black swans (Taleb, 2010), but limit the downside risk, both in terms of single failure, as well as interdependent systemic failure point of view. This should be great area for mathematical portfolio risk analysis models, such as the value at risk or shortfall (Goldberg, Menchero, Hayes, Mitra, 2010).

I believe that from the perspective of startup performance, however, what happens after the investment is much more important than before the investment, especially in the early stages of the startup life-cycle. In my opinion, the ‘trust’ between the venture financier and start up founders is vital. I made my thesis on the topic a few years back and formulated the ‘trust’ model in it (Risku, 2010). The model suggests that the ‘trust’ could explain the effectiveness of the relationship between venture financiers and start up founders and that the ‘trust’ could be the essential catalyst for startup performance. Behind this thinking is the premise that the ‘trust’ promotes agility. Interestingly, the recent ‘lean startup’ ideology proposed for example by Steve Blank (2007) and Eric Ries (2011) and ‘trust’ both point towards the ‘agility’.



Taleb N (2010) “The Black Swan, The Impact of the Highly Improbable”

Goldberg L, Menchero J, Hayes M, Mitra I (2010) “Extreme Risk Analysis”

Risku J (2010) “Trust Ecosystem: The Foundation of Startup Performance”

Blank S (2007) “The Four Steps to the Epiphany: Successful Strategies for Products that Win”

Ries E (2011) “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses”

Case: MyPose

MyPose LogoRight now brick and mortar stores have huge challenges while integrating into digital world and competing with their online counterparts. Yet, as they’ll let the consumers really see and feel the products they’re invaluable piece for both the brand owners and consumers. MyPose bridges this gap. MyPose is digital fitting room display that allows great fitting experience and social feedback for the consumer. More importantly however, it’s an effective social marketing tool for both the stores as well as brand owners. It provides additional revenue stream from brand owner campaigns for stores as well as make their own marketing easy and cost efficient. It’s a game changer for the fashion industry.

So far MyPose has been tested by Marimekko, Calvin Klein and Mick’s as well as appeared on the Finland’s Next Top Model TV-show.

“Butterfly has right expertize and matching mindset to make Mypose as disruptive marketing tool.” (Lassi Anttonen, CEO of MyPose)

Butterfly invested into MyPose because of their industry dynamics changing value proposition, clever business model that has strong re-occurring revenue elements and a billion dollar market opportunity. Furthermore the team has demonstrated both the ability and commitment. In addition MyPose has all characteristics of a naturally viral product. Butterfly investment will be used to validate the value proposition and the business model, acquisition of key reference customers as well as establish the required metrics to leverage the valuation up for follow-on financing rounds.

Case: FilmMe Group

FilmMe LogoPeople want to create interesting content of their activities. For instance helmet cameras have spread like a wildfire. Yet there’s been only one way to get footage of yourself in action; having someone else filming you. Usually it’s either difficult, expensive or both to shoot a high quality video of yourself and share it in social media. FilmMe has a unique solution to this need. FilmMe is a patent pending automated camera system that shoots professional quality HD video of the subject without a cameraman. It tracks the movement, pans and zooms as needed and finally sends the video automatically to ones’ FilmMe account. The whole process is initiated with a press of single button. That’s easy.

The FilmMe system tracks the location of the wristband, pans and zooms the camera accordingly.

The FilmMe system tracks the location of the wristband, pans and zooms the camera accordingly.

FilmMe was the highest scoring Moneytalks Investor forum winner in the history with average score of 4.53 out of 5. Prior to investment they had also secured 180k€ worth of letter of intents from prospective customers.

”FilmMe is on the verge of international breakthrough with a product that has a market potential of several hundred millions. Because the vast majority of our target market is international we wanted a professional investor, who can help us ahead also in the longer run. In addition to financing Butterfly brought valuable knowledge for instance into areas of IPRs, distribution channels and business models.” (Tapio Koivukangas, CEO of FilmMe Group)

The camera system is installed into venues, but the end users get a stylish wristband that identifies the user, allows to start and stop shooting the video and is used for automated camera control.

The camera system is installed into venues, but the end users get a stylish wristband that identifies the user, allows to start and stop shooting the video and is used for automated camera control.

Butterfly invested into FilmMe because the value proposition for different actors is clear, there’s attractive business model, demonstrated market traction and a billion dollar market opportunity. Furthermore the team is well balanced mixture of technological skill and top notch marketing expertise. In addition FilmMe has all characteristics of a naturally viral product. Butterfly investment will be used to further validate the business model and establish the required metrics to leverage the valuation up for follow-on financing rounds.

Case: NWG Tools

NWG Tools logoTiling in construction sites is traditionally labor intensive and requires plenty of manual work. NWGTools has invented a patent pending method that will improve the efficiency of tiling by 20-150%. As the construction business is heavily competed and margins of subcontractors low the efficiency increase means over 200% increase in the margin of an average tiling contract. With such market dynamics there’s no one who could afford not to use NWGs method once it’s launched. That’s a real revolution in the tiling.

A-tile makes tiling over 100% more efficient than using traditional methods. That's several hundred percent increase in margin of a tiling contractor.

A-tile makes tiling over 100% more efficient than using traditional methods. That’s several hundred percent increase in margin of a tiling contractor.

So far NWGTools has built a proof of concept product which has been able to prove the efficiency increase in a real construction site on a real tiling contract.

”At first we were contemplating between traditional angel investor and Butterfly Ventures. Fairly soon it became evident however, that Butterfly, due to their experience and business knowledge, would be a superior partner – also for the longer run. The benefits were clear. Already before the investment Butterfly helped us to develop an excellent way to protect our business and intellectual property rights.” (Sami Jussinniemi, CEO of NWGTools)

Butterfly invested into NWGTools because the value proposition is exceptionally clear and simple. NWGTools has found a really neat way to patent the key technology and unlike most cases it seems to be both difficult to go around and easy to enforce. Furthermore the market potential for such product is several hundred millions. The team has excellent industry expertise as well as demonstrated commitment and capability of operating lean. Butterfly investment will be used to build the first commercial product version, further validate the value proposition with the customers and acquisition of key reference customers.

Butterfly Ventures Announces the First Investments

Butterfly Ventures announces the first investments of Northern Startup Fund into three innovative startups: FilmMe Group, NWG Tools and MyPose. The companies are all based in Oulu, Finland. With Butterfly Ventures investing in them, the companies will speed up their market-entry and accelerate their business growth.

The first investment rounds vary between approximately 100 000 and 200 000 euro, from which the Butterfly Ventures share varies from 40 000 to nearly 100 000 euro. In addition, parties have agreed on the milestone tied follow-on funding that may increase the total investment of Butterfly Ventures up to 500 000 euro per company.

We were contemplating between traditional angel investment and Butterfly at first. In the end, it was evident that Butterfly due to their experience and business knowledge would be an excellent partner – also for longer run”, said Sami Jussinniemi, CEO of NWG Tools “The benefits were clear, because Butterfly helped to develop an excellent way to protect our business and intellectual property rights already before the investment.”, he added.

The announced portfolio companies have been selected out of nearly 200 startups that were evaluated in the past six months. What these companies have in common is a sizeable market potential, appealing value proposition and business model, as well as, an excellent team. In the majority of target companies, there is also a real opportunity to protect the market position either using IPRs or the business model.

We are acting according to lean-ideology. In practice this means, for instance, that we also aim to test a certain concrete and relevant aspect of the business with the investment, such as, how the product will be spread virally.”, told Matti Kanninen, CEO of Butterfly Ventures “It is great that startups seem to highly value the help and support we can give them already during the evaluation process prior to the investment.”, he added.

In addition to the announced investments, Butterfly Ventures has several other cases under work to become investments in the near future. The majority of these companies are either in a seed or pre-seed stage. Butterfly Ventures will make first time investments in approximately ten new target companies per year.

Enquiries and additional information

Matti Kanninen, managing partner
Phone: +358 (40) 5455877
Email: matti@butterfly.vc

Butterfly Ventures

Butterfly Ventures is an early stage focused startup development and venture fund management company located in Oulu, Finland. Behind the company are Matti Kanninen, Antti Kosunen and Juho Risku as well as Board members Jukka Mäkinen and Jari Pasanen. Butterfly Ventures has offices in Oulu and Helsinki.

Web: http://butterfly.vc

Northern Startup Fund

Northern Startup Fund is a venture capital fund managed by Butterfly Ventures that invest into early stage startups. It is the first asymmetric fund in Finland. In the case of Northern Startup Fund the asymmetry means that the public investor, which benefits also in a form of tax income, lowers the risk of a private investor by offering a possibility for returning the invested capital and profit share before the public investor. From the private investors’ point of view this improves the risk – return expectation ratio significantly. The investment capital of Northern Startup Fund will be 10 million €, half of which comes from the City of Oulu and the other half from private investors.

Resources

Download PDF: EN, FI