As more funds and aggregators are emerging, for investors it’s preeminent to anticipate the performance of the operators. Here’s my 10-point fund operators evaluation cheat sheet:
1) Underlying asset class: How’s the return/risk ratio of the underlying asset class? -> Possible red flags: low margins, high competition, high acquisition multiples, high volatility, no diversification of traffic/revenue sources
2) Team: Experience in acquiring and operating this kind of assets? Holistic team with all relevant positions (CEO, COO, CTO, CIO) covered? -> Possible red flags: No mgmt and/or team in place, dependency on 1-2 key players
3) Historical performance: How long are they operating in this (very!) space with what performance? -> Possible red flags: no dedicated knowledge, only general “online marketing” or “eCom” skills, no track record
4) Dealflow: Proprietary sources beyond on-market. -> Possible red flags: Just on-market deals, missing out on hidden gems
5) Value add: Proven strategies to achieve operational gains -> Possible red flags: No KPI-driven operational strategy, core focus on valuation arbitrage or financial modeling
6) Underlying magic: Any strategic moat that sets the operator apart from competitors, especially mid- to long-term -> Possible red flags: No proprietary SOPs, no proprietary tech stack, no exclusive know-how
7) Synergetic portfolio: Allowing to tap into synergies -> Possible red flags: a random basket of assets or asset classes, generating higher costs with lower synergies, at the exit a buyer’s nightmare
8) Overall Fund volume: Allowing for reasonable diversification and alternative strategic approaches -> Possible red flags: fund’s too small, no diversification
9) Skin in the game: From an investor’s perspective, nothing will protect your money as managers with skin in the game. -> Possible red flags: Mgmt is not or has never invested substantially in their own business
10) Carry and proceeds: Fine line, getting investors to an attractive MoM while keeping operators motivated -> Possible red flags: Any share leading to an unusual MoM, high fixed or setup fees Neither the investor nor the operator can predict the final returns. It’s an investment, not a T-bill. But avoiding these major downfalls will get you in the pole position to capture the returns of any alternative digital asset class