As part of its ongoing series of virtual events for participant organizations, the AgeTech Collaborative™ (ATC) hosted an “ask me anything” event with Frank Rotman, co-founder of QED Investors, a global leading boutique venture capital firm focused on investing in early stage, disruptive financial services companies.
The session covered a range of topics; some highlights are summarized below. You can check out the entire video here, in ATC’s resource library, which features dozens of recordings, research papers and other materials available for ATC participants.
The session led off with a question about the trends in FinTech that Rotman finds exciting, with particular regard to intergenerational financial solutions.
When it comes to which companies QED decides to underwrite, Rotman broke down QED’s particular focus on founders’ specific pitches. “On the surface, every business sounds the same,” he said. “It's really about the statements founders make, that we evaluate to figure out if there’s a business that can be built that could be large and durable and have real enterprise value.” The most important of these statements are the problem statement and the solution statement.
For a company’s problem statement, Rotman evaluates whether the problem is real and profound (meaning that consumers are well aware of the problem), or whether it’s manufactured. For a business to have a shot at becoming viable, the problem needs to be both real and profound.
Regarding a solution statement, Rotman noted how founders should make sure their solutions aren’t just better than existing solutions, but enough better to overcome friction in the marketplace.
Even more important, founders should view their solution as merely a starting point, because the chances of getting the product right immediately out of the gate are slim. In fact, Rotman said, founders should be in love with the problem they’re solving for — not the solution they’re building. This mindset helps keep founders and their startups nimble and able to adapt as necessary.
One participant asked whether Rotman has a particular system for identifying potential in founders or their startups, or whether he goes with more of a gut feeling.
Some VCs are closer to talent scouts, Rotman said. They look for people who they believe can solve problems, back them, then “wake up in five years to see if they made any money.” Not only is that risky, it’s not a strategy that's scalable and repeatable.
Rotman rejects that approach as so much nonsense in favor of a systematic process for deciding which companies to fund. “We’re able to back things that produce multi-billion-dollar companies because we do our work” of evaluating founders and their problem and solution statements.
Another question concerned what startups can learn from other startups that have failed.
Rotman highlighted that sometimes you can do everything right and still not succeed — which simply means that the business was harder to build than anyone imagined. “It happens. Some of the best founders fail. That’s OK.”
But when a venture fails, you should be able to pinpoint why, which often comes down to identifying what kind of risk you underestimated. Major types of risk include:
• Technical risk: Can a product actually be produced?
• Market risk: Does the market want your product at the price you can offer it?
• Operational risk: Is your team talented enough to implement all the steps necessary to produce your solution?
- Rotman noted that sometimes you simply can’t foresee the kind of risk that derails a company: such as the arrival of the COVID-19 pandemic.
- A final question was whether there is anything a founder could do during discussions that would immediately disqualify them from funding consideration.
Rotman emphasized the importance of founders maintaining the ability to have an open dialogue with VCs about areas of disagreement. In fact, Rotman will often ask “poke the bear”-type questions specifically to discover how a founder thinks and to explore their ability to have genuine conversations about points of disagreement. “Some founders get very defensive. They get into a mode of trying to prove to the VC that the VC is wrong. When they say, ‘Let me convince you’ — no. You’re done.”
Instead, Rotman looks for founders who approach such situations with curiosity. “They can say, ‘I understand how you came to your conclusions, using these frameworks. I’ve come to a different conclusion, given the perspective I have. If there’s a disconnect; let’s talk about it.’” Rotman often welcomes follow-up discussions — even with startups he’s turned down — when founders approach diverging opinions in this way.
You can learn more about QED Investors at their website.
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