Did you know that a majority of successful start-up deals for VCs resulted from start-ups that the VC’s identified, and not the other way around? (Think anti-portfolio!)
“Don’t take VC money unless you have to!!” Ironic and paradoxical coming from an investor? Daniel Kranzler, an experienced Silicon Valley VC who has mentored and invested in many successful impact start-ups in emerging economies, offers this simple and astonishing advice for startups:
- Your start-up may not be venture investment-ready at every stage. VC money is the correct alternative only when you have clearly mapped out key inflection points that propel your start-up to its next level of growth. Raise VC money to scale-up your impact and value creation. Debts, grants, FFF (friends/family/fools) money and bootstrapping might be the solution for all other funding needs.
- Fundraising cannot be approached as an end in itself – it’s the impetus that drives your start-up to achieve its growth targets. In fact, funding is the beginning of the journey to your start-up’s next inflection point.
- Venture Capital is a good source of funding to scale, but it’s also the most costly capital in the world. It’s expensive to raise and expensive after it’s been raised!
Clearly, you are the single most important investor in your start-up. Therefore, as an entrepreneur, you must “think like an investor.” Here are three ways to don the investor’s hat:
- Unit Economics is important from Day 1. As you take each step on your start-up journey, aim to bring your CAC closer to your product’s price point.
Everyone is talking about lessons from the WeWork debacle, but the start-up world is rampant with similar lesser-known stories. 10% of start-ups analyzed by Autopsy.io had to close shop because they were simply outcompeted. It was a classic case of a competitor with deep pockets discounting its way to victory against their less endowed start-up competitors. But are discounts unit-economics friendly? How can loss at a unit level ever become profitable? That’s a mathematical contradiction: (-1) + (-1) + (-1) + …… > 0!
Niranjan Subba Rao, co-founder of Cyclops, unabashedly says, “I will place profitability over growth!” In fact, a recent report on PayTM showed that for every rupee earned as revenue, PayTM’s losses ballooned up from 29 paise in 2017-18 to Rs. 14 in 2018-19. A bad case of unit economics?
If you are reaching out to an investor, be prepared to answer a simple question: “How long will it take you to recover with margins, the cost of acquiring and servicing a customer?”
- Check your 4A’s – Ability, Acceptance, Adoption and Alternatives – before making any product decision.
Steve Jobs is often quoted by ambitious entrepreneurs and product managers for saying, “A lot of times, people don’t know what they want until you show it to them.” For every successful start-up “a-la Apple,” I can cite a thousand start-ups that failed to follow Jobs’s principle. A customer might look at what you have built and find it interesting. But if you were to ask them, on a scale of 1 (“no”) to 10 (“here’s the money”), what are the chances that they would choose 10?
Consider these significant questions built around the 4 A’s:
- Do you and your team have the “Ability” to build the right solution?
- Will customers “Accept” that they need this particular solution to solve their problem?
- Will customers “Adopt” your solution and pay for it? The “unicorn” start-up – Blippar – closed shop in 2018 for one significant reason; it built a complex AR app that customers could not adopt and use because they simply didn’t possess the necessary skills.
- Does the customer find existing “Alternatives” sufficient, and is a new solution warranted and acceptable?
Simmi Sareen, Co-founder of Loans4SME, asked herself the “4A’s” questions when she was building a B2B lending marketplace for SMEs. Applying the Acceptance and Alternatives lens, she zeroed in on two sectors as her first target market segment: high-growth start-ups and renewable energy enterprises. “We felt that both of these sectors need capital,” Sareen stated, “and because these entrepreneurs have come into the market recently, they don’t have the collateral that banks look for – so, they are unable to get capital for growth.” This mindset helped her build both supply and demand sides on the Loans4SME marketplace quite rapidly.
Wearing your investor’s hat, try articulating a clear answer to this question: “How is the buyer/user solving their problem now, and why is it worth their cost, time and effort to adopt your solution?”
- Product-Market fit is not everything. Expansion to Product Message – Channel Audience Market fit (PM-CAM fit) must be included.
Not many have heard of the social networking site, “TeeBeeDee” (2007-2009), which raised 4.8 million dollars and acquired 200,000 monthly unique visitors before it was forced to shut down midway through its journey towards product-market fit. If we were to dissect the reason for this start-up’s failure (despite having a very successful serial media entrepreneur at its helm), we would reveal the following:
- TeeBeeDee had problem-solution fit. In 2007, the teens had MySpace, the 20’s youth had Facebook, and the 30’s working professionals had Friendster. The 40’s-baby boomers did not have a social networking site they could call their own.
- TeeBeeDee did not get its Product Message-Channel Audience-Market(PM-CAM) fit right. In the process of creating and communicating its value proposition as a compelling “message” to its “audience”, TeeBeeDee lost the game. It had positioned itself as a site for the 40’s Baby Boomer demographic, and its offerings were tailored around the issues that people in that age group faced. However, not wishing to be constantly reminded of their age, these proposed audience members did not visit the social media site often. TeeBeeDee had failed to propagate a Message that resonated with its Channel Audience and couldn’t grow the Product Market for a profitable business model.
Ask yourself, “If you remove your product from the market, will at least 40% of your customers contact you and ask for it?”
Investors will try to understand your Go-to-Market strategy by asking multiple questions that might include the following:
- What are the sales & distribution channels, their purpose, and effectiveness and the distribution strategy over time?
- Is there a clear understanding of the distribution costs through the various distribution channels?
- What’s your traction to date?
- Has your Minimum Lovable Product – MLP – been launched?
- What are your key metrics around user growth, revenue growth, and key milestones?
Now that you understand the thinking that goes on when you wear the investor’s hat, let’s return to the traditional interpretation of business as defined by management guru, Peter Drucker: “The purpose of business is to create and keep a customer.” I would extend his statement a bit farther by rephrasing it to read, “The purpose of business is to create and keep paying customers in a way that makes more money than you spend!” Choosing the right problem to solve, finding profitability at a unit level, and achieving PM-CAM fit can accelerate your path to building a sustainable, viable, and fundable start-up business. Think like an investor and they will chase after you.
Note: This post originally appeared on Inc42.