How we select our start-ups at PyratzLabs, Web3 studio

Evaluating start-ups potential is far from true science, and is a contextual work: it is relative to your deal-flow, your investment thesis, the investment stage, your risk level…

However, we decided at PyratzLabs to create a scoring system in order to be as objective & factual as possible, and have the same comparison basis for all our applicants.

As an early investor, our methodology mostly applies at “pre-seed” & “seed” stages. Team will count for 50% to 70%, idea / MVP / product from 30% to 40%, and we also factor “PyratzLabs Synergies” (10% to 20% of the scoring) as an incubator that can co-host start-ups with natural synergies.

Last important note, the key factor to score & choose the best start-ups is the DEAL FLOW. Hence, a scoring system makes sense if you analyze a large number of start-ups through your network (events, referrals, …) and your application website.

Team - From 50% to 70%

Team is the main component to score (more than their idea / MVP), and we divided it in 4 parts

Entrepreneurship (especially for the CEO)

We score every founding member of the team (at least the CEO & CTO), and we will primarily look at their entrepreneurship spirit: personality (resilience, never give up mindset), previous entrepreneurial experience (serial entrepreneurs is a big plus), main achievements, …

Fun fact: we ask our founders to fill a personality test, and we mostly get the “protagonist” (assertive & influential) type in the results... dogs don't make cats!

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Market fit

Is the team in the right industry / problem? We will especially study if their knowledge & network are consistent with the fields they address. 

If you address currently competitive markets like WEB3 gaming, we will highly prioritize teams that already made games or worked in gaming studios … or any other unfair advantage, except “I was a big player” argument :)

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Co-founders fit

Entrepreneurship could be seen as a co-founders adventure, and you need to make sure that they will fit & keep the same level of motivation during several years. If a strategic co-founder (with a high % of shares) leaves just after a few years, it can easily lead to serious troubles / kill the start-up.

For our application forms, we ask for a small video of the founders in order to pre-assess a good fit, even if it will mostly be challenged during interviews.

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Background / academic

Studies (& the reputation of the school) are extremely important for elitist / competitive jobs, but less relevant for founding a successful start-up. However, it will be an important factor for certain technical founders and always be a sign of hard-work / competitive mindset + network.

Studies are a bonus as a founder, but not something mandatory like it can be for the job market. Interesting entrepreneurship experience can rapidly override irrelevant academic background.

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Product - 30% to 40%

All right, now that the team is scored (we do it on a scale of 5), let’s see what they built so far!

‍Market edge / unfair advantage

First, are they trying to build something big? If you want to rapidly raise based on company valuations reaching millions of dollars, we need to verify that the market is big enough to create a big player generating dozens of millions $ in the near future. We of course indirectly assess if the start-up is able to “scale”, a term widely used in this start-up ecosystem.

If it is the case, the real question is “why them?”. In the VC world, there are 2 common sentences that are linked: “idea has no value” and “invest in the team”. Indeed, it is easy & common to find a problem in an industry and imagine ideas to solve it. Millions of people think about smart possible solutions related to the problems they encounter in their daily life. 

Fun fact: around 95% of web3 gaming startups applying to our program say they had the ultra smart idea to create a “play AND earn” instead of a “play 2 earn” ... Ideas/concepts have no value in our competitive & hyper informed world!

Hence, the question you should ask when you want to solve a problem by founding a start-up is “will I deploy all my energy to do it (16+ hours a day, including week-ends), and build / leverage all my privileged skills & network in this field for at least 5 years?” (average exit is 10 years)

Go-to-market is so hard & unpredictable in WEB3 that you often need to have strong “unfair advantages” in order to be selected, even if we will “boost” your market edge through our network. 

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MVP / beta version / demo

MVP (Minimum Viable Product)  is a good way to filter projects that are able to deliver versus the ones that only sell dreams. Of course, some projects in WEB3 are long to develop (L1 blockchain, AAA game, …) but you still need to demonstrate your ability to create something, even if it is a very light version / visual demo.

WEB2 products trying to create a WEB3 version are an interesting case, as they already demonstrated the ability to deliver. Even if we need to make sure that tokenomics (if ever) & community culture make sense, 2 regular weak points of WEB2 products that pivot / extend to WEB3.

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Traction / momentum / KPIs

Traction is the most objective market fit indicator of the start-up, even if it is hard to assess at early stage and KPIs vary a lot depending on the nature of the service (daily active users, monthly active users, monthly signups, churn rate, …). When the product is not launched, we often look at twitter / discord members to assess community traction, but we are very careful on this aspect as it is easily manipulated / inflated, with bots & short term speculators. Most important, know your specific KPIs & demonstrate that you follow them with a clear strategy!

NFTs collections are a great tool in WEB3 to rapidly gain measurable community traction, but it can also rapidly kill your project due to very volatile market conditions & high proportion of bots & speculators. 

Fun fact: Dogamí, by launching on Tezos instead of the most popular chains like Ethereum & Solana, was able to attract an engaged community of dog lovers instead of a large portion of speculators / NFT flippers. Dogamí today benefits from one of the top engaged community in WEB3.

Finance / Business model

Let’s talk about the famous “Business Plan”, complicated & so long to realize & update. What is challenged in this section is the business model: has the team already clearly identified what could be the revenue generation drivers, and in which proportions? (making sense when raising millions and trying to reach a unicorn status). 

We also assess the nature of revenues (proportion of recurring), even if it is often very theoretical and subject to change. We often consider that a start-up is a company that did not yet find its business model (which is often true in the tech sector, especially at the beginning of social networks like facebook was), so we are “flexible” on this aspect.

Mostly, demonstrate that you know your numbers and simulate possible outcomes, even if the reality can be far from early projections.

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Tokenomics

The famous section specific to WEB3 projects!  We clearly see that many projects are not confident on this section, simply because we are still at an early stage of this science.

What we will notably assess is the demand / utility of the token: does it decentralize the solution? Does it incentivize users of the solution (notably through X2Earn mechanisms)? Is it capturing enough value in a significant market? If there is also equity & NFTs, how are they all capturing value?

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After 5 years of tokenomics advisory, I'm surprised how many projects do not need to decentralize their solution or reward their user, but still want to introduce a token in order to fundraise in a non-dilutive way. Also, projects often underestimate the complexity that will be introduced by the secondary market (volatility, exchanges conditions, liquidity providing,  regulation, ...)

We also analyse the supply aspects (total supply, allocation, vesting, staking, …) that need to make sense with the utility & the market targeted, but this part is irrelevant if token utility does not make sense, and will need constant monitoring & innovation during life project.

Since the NFTs craze that started in the summer of 2021, creating an economy delivering value simultaneously to equity, tokens & NFT holders became a huge challenge, requiring a lot of expertise & simulation work to succeed. We will publish a dedicated article on tokenomics in a near future

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PyratzLabs Synergies (from 10% to 20%)

As an incubator specialized in Web3, we have the privilege to help & be highly active in reducing the risk of failure of our start-ups. We help them to go fast, so it is important to feel that we have a good fit with the team and be able to leverage all our expertise (tech, marketing / growth, finance, tokenomics, …). Also, as we have many start-ups incubated and strategic investments in WEB3, we can activate synergies / partnerships between them.

In a highly competitive & innovative space like WEB3, an incubator centralizing all the expertise and creating synergies between all the start-ups can make the difference.

Red flags

Red flags are various elements that do not bring confidence to the project / the founders. For example, a lack of knowledge of the market and its numbers during the interview, a lack of honesty / too much exaggeration, … We also often find red flags on the cap table repartition, with one of the strategic co-founder having much less than the others, or some investors that took too much participation at the start, … And when you are in the space since a long time, you can spot actors with a bad reputation / previous bad practices that are involved into the project.

Every element that makes you ill-at-ease or not confident, and it’s often spotted through interviews & deeper due-diligence.

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Double review

All the start-ups applying at PyratzLabs are scored by a minimum of 2 members of the team, avoiding single judgment biases. If the average score reaches a threshold after further due-diligences & interviews, the project is assessed by our committee composed of successful serial entrepreneurs.

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To sum up?

You cannot reliably score a project by only looking at the pitch deck / whitepaper, the website, or listening to an influencer, which is sadly frequent in the WEB3 culture. An effective scoring requires due-diligence (“do your own research”) and interviews with the founding team, answering one simple question: “who and why them, together?”.

After all, WEB3 startups (even NFT collections) have the same WEB2 main challenges: growing fast, hiring talents, building an optimal management organisation & perfectly serve a client. Hence, only a highly motivated & reliable team, with a privileged network, able to attract people & capital have a serious chance to succeed, even if it is supposed to be totally decentralized in the future.

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