Last week we hosted a talk with Madison Point Capital to dig into how they both invest and incubate startups.
We heard from leaders of each strategy: Jaja Liao, who focuses on investing in early stage startups at Madison Point Capital and Rebekah Foster, who focuses on incubating startups at 25m Health (a joint venture of Madison Point Capital and two health systems).
They went really deep into how each approach works, as well as which route works best for what types of founders, companies and sectors. Read on for their insights or to listen to the full interview.
How does the process differ from a traditional VC investment vs. incubating a startup
Jaja & Rebekah shared their processes for vetting & incubating startups - which are fairly typical for how most investment funds & venture studios operate.
The Madison Point Capital investment process:
Initial Call: 30-minute Zoom call with a member of the investment team, often an associate (but can be anyone). It's primarily a screening call where the founder presents their pitch.
Deal Flow Meeting: The associate takes notes and presents the opportunity at a weekly deal flow meeting. This meeting involves the entire investment team discussing potential investments.
Second Meeting: This call involves 2-3 investment team members. The founder presents their pitch again, but this time the questions are more detailed and sophisticated.
Research/diligence: The investor begins reaching out to industry contacts for insights and reactions about the startup.
Investment Committee: The founder pitches to the entire investment team in a longer meeting. Since the team already has context from previous meetings, the questions are more focused and in-depth.
Deliberation: The team deliberates and decides whether to proceed, decline, or conduct further due diligence.
This process is pretty quick, it can take around 3-4 weeks.
The 25m Health startup incubation process:
Early Validation: The incubation team conducts early validation, similar to what a founder or investment team would do during due diligence.
Incubation Memo: The team prepares an "incubation memo," akin to an investment memo. This is presented to their investment committee to seek approval for what is considered "pre-pre-seed funding" (with pre-seed funding coming later).
Entrepreneurs in Residence (EIR): The team recruits Entrepreneurs in Residence to act as the early founders of these businesses. EIRs are identified through an external search to find the right fit and are brought on as contract employees with salaries and the opportunity to select a co-founder.
Studio Services Budget: EIRs receive a budget for strategic and back-office services provided by the incubation team, aimed at reaching key business milestones.
Investment Committee: Once these milestones are met, the founder presents to the investment committee to secure pre-seed funding.
Transition to Independence: At this stage, the process aligns with that of traditional pre-seed founders. The incubation team's involvement gradually decreases as the founder builds the business independently.
Some Insights from the Conversation
There were a lot of great learnings that Rebekah and Jaja shared. Here are a few more answers they shared from our interview:
Are there certain kinds of companies that are better for incubation vs investment? Incubation can be especially helpful in deep industries like healthcare and supply chain, where an industry-specific venture studio might already have deep connectivities in the sector. Sometimes it works especially well for non-technical founders who could use more support on the technical side, or a second-time founder who failed the first time around and wants to de-risk it.
Are there certain kinds of founders who are a better fit for incubation vs investment? First-time founders can enjoy the experience because they have so much to do and learn, and it can be helpful to rely on a team for things you might not have time for, like back-office operations.
How much support does a founder get from the venture studio pathway? For months, we’ll provide a lot of man-power on both the business and technical side, and a huge part of it is helping with recruiting. We are very involved for many months as we get them to a place of greater independence and investment-readiness.
How much support do founders get from Madison Point Capital investors? It’s really up to the founder. We are always there for them as much as they want to be supported.
What skills should founders develop before founding something? Just ask a lot of potential users. Would you pay money to buy this? A lot of people come up with great ideas but it comes down to who is going to wire me money to get access to it. Customer discovery is the most important thing at the early stage, you have to do an endless number of user interviews.
And a few more great nuggets and reminders:
We are always looking for direct industry experience and preferably startup experience as well. The key is “proprietary insights based on your experience”
So much of being a founder is sales. It’s helpful to personally understand the problem and know the types of roles you are selling into, and for them to feel you really understand their pain points.
“Why now” is really important. Are there regulatory changes that are making this more possible, an incumbent shutting down, a gap in the market presenting itself, geopolitical changes, tailwinds in the sector, etc.
The most important thing for founders to think about: is there a pain point - and a willingness to pay - on a recurring basis?
Listen to the full interview for even more insights: