High margins, hyperkaizen: what this VC looks for in startups

Peng T. Ong is Co-Founder and Managing Partner at Monk’s Hill Ventures.

As a venture investor, I regularly get asked about what I look for in a startup and what characteristics a business needs to scale quickly and significantly.

Image credit: Timmy Loen

I’ve been repeating my answers often enough that I thought it was worth writing them down and sharing them with the community:

1. Long-term accumulation of differentiated proprietary information

‍The only sustainable way to keep a competitive edge is by accumulating proprietary information.

This is quite a strong assertion, but think about it: Can the startup accumulate this information exponentially, in a way that adds value to it as it grows. ?

Furthermore, if you were to build what I call virtual relationship managers – the combination of large language models (LLMs) and proprietary information to provide AI support for your business that sets you apart – you will need this pool of proprietary information.

2. Not just positive unit economics, but high gross margins

‍This seems a bit redundant to mention but it might not be clear enough, given the number of startups in the last decade or so that grew sales with negative unit economics to reach unicorn status.

Perhaps with the exception of the initial product-market fit exploration phase, startups should have positive (and growing) unit economics, or at least show the possibility of it, in order to be considered. Still, having positive but low gross margins (GMs) is a tough way to build big businesses.

3. R+K > 1

‍Customer retention (R) plus product virality (K, virality coefficient) should look like they have a chance to exceed 1. When that happens, the business grows without direct acquisition cost.

Both retention and virality are functions of the product, so increasing them is fully under the startup’s control.

This is not the case when a startup has a business model driven by lifetime value/customer acquisition (CAC) cost > 1.

CAC is not within the control of the business. I have written about this in detail in a separate article.‍

4. Having a product with lock-in

Lock-in is a characteristic of a product that drives customers to keep using it. For example, as company X grows its business, if it has a customer relationship management (CRM) system that also handles the sales pipeline, it becomes increasingly harder to move to a different CRM. Thus, whichever firm is providing the CRM to company X has some degree of product lock-in.

5. Hyperkaizen

6. AI as relationship managers

‍7. Removing/minimizing product-market fit risk

8. Philosopher-warrior-nurturer founder