Venture Fund: How We Select Companies

Raison has invested in 40 private companies and startups, including Revolut, SpaceX, and Anthropic. The fund’s average return on revalued companies exceeds 35% per annum in USD.

When selecting companies for the portfolio, we are guided by criteria such as the stage of business development, financial performance, market niche, geography, founders’ personalities, leading investors, macroeconomic cycle phase, company valuation, and others.

1. Stage of business development

70% of startups either close down or do not generate significant returns for investors. 30% make it to M&A or IPO. 1% reach a valuation of $1+ billion, according to CB Insights data.

The younger the startup, the higher the potential returns for the investor and the higher the risks.

Raison Fund primarily invests in the shares of large private companies — those that have yet to go public but already have a sought-after product, steadily growing revenue, and sometimes even profit. Such venture investments are also called pre-IPO investments, meaning investments in companies whose IPO is expected within 1–3 years.

2. Financial and business metrics

Depending on the company’s stage of development, its metrics — revenue growth, cost of acquiring users — vary. The younger the startup, the faster it needs to grow.

Investors in large private companies usually do not have access to issuer reports, as stock purchases occur in the secondary market. In this case, data from open sources (media, company website) or indirect metrics are analyzed.

Indirect metrics include number of users, trading volume, number of downloads, and more. By knowing the relevant indicators of public competitors, one can assess the company’s market position.

3. Market

The ideal market for a venture investor is overgrowing and has yet to be saturated, i.e., with low competition.

A good example is AI startups attracting billions in investment in 2023. Other fast-growing markets include cybersecurity, space technology, and biotechnology.

Entering the market at the wrong time is called bad timing. Even a talented team with a breakthrough idea and thoughtful business model will only be able to scale in a market that is ready for it.

4. Geography

Most companies in our fund’s portfolio are registered in the US. There are also companies from Europe, Hong Kong, Israel, and Latin America.

The dominance of US issuers is explained by the fact that:

• More technological startups are launched in the US than in any other country;

• There are also more venture capital funds in the US — startups develop faster thanks to access to capital;

• The US is a large market where you can grow for a long time without entering other countries.

5. Founders

The role of founders and top managers of a company is difficult to overestimate, especially in the early stages of a project.

We look at the founders’ careers, experience building previous businesses, education, and other accomplishments. The composition of the Board of Directors is also essential, as it may include industry veterans who will help promote the startup in the market.

For example, the Board of Directors of our portfolio company Destinus includes the former Minister of Economics and Technology of Germany, the former Minister of Science of Spain, and the former head of the French Space Command.

6. Lead investors

The Cap Table, i.e., the list of direct investors in the company, is another benchmark for selecting securities for the portfolio.

The more prominent investors included, the more likely the company’s success. Reputable venture capital funds conduct high-quality due diligence and provide startups with not only money but also expertise and network. In professional slang, this is called smart money.

Of course, the Cap Table criterion doesn’t always work, so relying solely on it is not an option

7. Economic cycle phase

The success of a venture investment is determined not only by the company itself but also by the economic situation.

Financial crises negatively affect startups in terms of revenue (purchasing power decreases) and access to venture capital (investors opt for less risky assets). In an unfavorable market sentiment, companies postpone IPOs, increasing the investment horizon.

Therefore, it is essential to assess the situation comprehensively.

8. Company valuation

The most challenging thing in venture investing is adequately valuing a company (its capitalization). Various multiples are used for this.

The most popular multiple is the valuation / projected annual revenue of the startup. The result is compared to similar metrics of other private and public companies in the industry.

It is important to remember that venture investors are buying the future: the company may have relatively low revenue today but massive potential for growth in the coming years.

9. Diversification

No matter how thorough the analysis is, diversification is essential. Venture investments have a high level of risk, even if the portfolio is assembled solely from the shares of large companies.

Venture capital should be allocated across 10–20 names, and the share of the venture in the portfolio should not exceed 20%.

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