Framework Venture Partners has spent the better part of a decade building an internal database of startups metrics—like revenue growth and burn rate—to rank prospective portfolio companies and gauge their likelihood of success. Now, as the market downturn casts a chill over startup investors, the Toronto-based venture capital firm is offering its vetting tool for free so others in the industry can make better-informed funding decisions.
Framework is launching the scorecard as it raises its second fund. The firm is targeting US$200 million to US$250 million. So far, it’s secured US$100 million and has begun deal-making. “A lot of people have been sitting on their hands or unwilling to participate. We’ve done the opposite,” said Framework co-founder and managing partner Peter Misek. “We’re active in the market, very aggressively.”
Misek spoke with The Logic about how the firm’s scorecard gives Framework confidence to invest in a downturn—and how it could help other VCs do the same.
How it works: The scorecard is based on detailed financial and performance data that startups disclose to Framework. That includes revenue growth rate, gross margins, marketing costs and lifetime customer value, among other metrics. The information is anonymized for all funders in Framework’s investor network—except Framework itself, which gets the benefit of seeing which data belongs to what startups at the outset. Companies are then benchmarked against each other and, if they want, matched with prospective investors.
The advantage: Misek said the system is designed to help investors make decisions based on a startup’s fundamentals rather than gut feeling. “There are some investors … [that] say things like, ‘Well, I like you as a founder and so I’m going to back you,’ and don’t look at any metrics,” said Misek. “The beauty of [using] numbers is that it removes a lot of biases,” and leaves just “relevant business metrics.”
For startups, the system gives them access to honest feedback rooted in data that can help them improve, said Misek.
Why now: Misek said Framework shopped around the scorecard in the past, but was met with little interest, noting that due diligence took a back seat amid the glut of money and exuberance that characterized the recent venture capital ecosystem. “It’s necessary for people to realize there’s no such thing as a free lunch—there is no such thing as being able to ride on hype,” he said. “If you don’t create value for customers as a technology company, if you don’t solve a real problem, ultimately, you’re worthless.”
Will startups use it? Misek said some founders will initially feel uncomfortable about divulging sensitive business information, but he expects this kind of vetting to become the long-term norm. Framework hopes to seed the network from the startups its own managers meet—more than 1,000 of them a month of which he expects more than half will agree to participate—and Misek hopes it snowballs. “My hope is that as we recover and we enter another bull market … the days of people basically ruining the market by being so manically positive, that those disappear.”
