I just had a coffee with Mei and Bill, two passionate students who are on fire about their new startup idea. It’s past the “napkin-sketch” stage with a rough minimum viable product and about 100 users.
I thought they had a great insight about an application space others had previously tried to crack. But they needed to convince investors that they are Facebook not Friendster.
Mei and Bill are building a better version of an on-demand help service like TaskRabbit. And “better” doesn’t do it justice. They have a unique insight about the nature of interactions between customers and service providers I have never heard before. If they are correct, they’ve found a unique combination of customers and value proposition that will make these customers want to immediately pay and repeatably engage. The early indication from their minimum viable product is that they have found signs of product/market fit. Even more interesting, their product might have a much higher initial order size and much greater lifetime value than existing on-demand help services.
All good. So what was the problem they wanted to meet with me about?
They explained that investors, even seed investors, were convinced that the market segment they wanted to enter was littered with failures. And as soon as they described the space, investors rolled their eyes and passed.
Creative destruction meets risk capital
Like all entrepreneurs with an idea burning bright, Mei and Bill thought they were the first to invent water, air and fire.
When you’re young you believe the world sprang into existence yesterday (or at least when you started college) and that anything older than three years ago is ancient history. Ignorance of the past and disdain of the status quo are part of how innovation happens. As companies get larger and individuals get older, most get trapped in dogma and aversion to risk. Meanwhile cultural taste, technology, and platforms evolve, and new things are possible that might not have been just years ago. The cycle of creative destruction of the old being replaced by the new continues, fueled by angel and venture capital.
And therein lies the catch — investors have longer memories of failures than new entrepreneurs. When you’re describing the future, most of them are remembering the past.
So Mei and Bill were facing two problems. The first was obvious; they needed to know how investors viewed their space. Second, they needed to know how to make it clear that the world had changed and that they had figured out how to solve the problems that cratered previous entrants. To do so they needed to learn six things:
- What companies in their space came before them?
- Why did those fail?
- Which investors got burned?
- How has the market/technology/customers evolved since then?
- What’s Mei and Bill’s unique insight that makes their startup different?
- Who else is playing in their space or adjacent markets? And how could they make that a strength, not a weakness?
What companies came before? Why did they fail? Which investors got burned?
Mei and Bill needed to understand the past so they could fund the future. I suggested they do some research by reading founders’ and investors’ public post-mortems of what went wrong. CBInsights has a collection of 300+ startup failure post-mortems, and Crunchbase has a startup failure database. Both of these are required reading. And others exist.
Finding these lists is just the beginning. Since Mei and Bill were networking, it would be invaluable for them to talk to the founders of a few startups that had built products similar to theirs that didn’t make it. You can get these meetings if you tell them what you’re trying to build and let them know you’d like to get smarter from them. You’d be surprised how many founders will agree to chat. (At least those who’ve recovered.) Ask them, “What do you wish you’d known when you started? What did you learn? What would you do differently?” And most importantly, “Did your investors understand the space? Did they help trying to find scale? Would you take money from them again?”
Out of those same lists (CBInsights, Crunchbase, etc.), keep a list of the investors who lost money on those deals. Not to avoid them, but to call on them when you’ve learned why you won’t make the same mistakes or have a better insight. Getting introduced as a team who solved a problem they’re familiar with may not get you funded, but if you pique their interest you will get a post-doc of the market and space as it existed. Your job is to process that information and understand what’s changed/what you will do differently to not fall victim to the same fate.
How has the market/technology/customers evolved? What’s your unique insight? Who else is in your space or adjacent markets?
Once you have a grasp of the past, you can realize it’s just a preamble to the present. Put together a single slide that graphically shows the evolution of the space you’re in. You’re trying to show what’s changed to make your startup economically viable today. What’s changed? Platform changes (web to mobile), faster technology (3G to 4G to 5G), commoditization of tech (Cloud). Has consumer behavior changed? Emergence of the sharing economy (Uber, Airbnb), brands no longer important (Dollar Shave Club)? All these examples ought to point out that the world (technology and market) is a different place now – and the opportunity is even bigger.
Finally, given what you’ve learned about the past, what’s your insight about the future? What do all these changes mean? What are the core hypotheses of why this is a potentially huge business going forward?
Understanding how the space has evolved, gets you from past to present. Understanding competitors and adjacent players allows you to map today to tomorrow. When I asked Mei and Bill if they could draw the direct competitors and adjacent players, they pulled out a trusty X-Y competitive analysis chart that made me want to shoot every management consulting firm that ever existed. The chart not only didn’t say anything useful, it gave Mei and Bill false comfort that they actually understood anything about the space around them.
Instead I suggested they start with a Petal Diagram. Rather than focus on just two dimensions of competition, this allows you to show all the adjacent market segments like leaves in a petal. You label each leaf with the names of the market spaces and the names of the companies that are representative players in these adjacent markets. You use this chart to articulate your first hypotheses of what customers segments you’re targeting.
Then follow up the Petal Diagram with another slide that says, here’s our unique insight that’s been validated by customer discovery. And you explain why now is the time to seize the opportunity.
If you’re talking to the right investors, this approach can generate a high-bandwidth conversation because you’ve given them an opportunity to critique your analysis of failure, risk, insight, and opportunity.
It was a lot of information for a coffee, and I thought I may have overwhelmed Mei and Bill with a fire hose of opinions. But the next day I got an email saying, “We’re on it. We have the first two interviews with ex-founders in our space scheduled.”
If you’re in a market that previously ate up lots of investor dollars, remember:
- Investors have longer memories of failures than new entrepreneurs do
- When you’re describing the future, most of them are remembering the past
- Remove those obstacles by educating yourself and investors about why the time is now
- Carpe diem – seize the day
[VentureBeat regularly publishes guest posts from experts who can provide unique and useful perspectives to our readers on news, trends, emerging technologies, and other areas of interest related to tech innovation.]
Steve Blank is a retired serial entrepreneur-turned-educator who created the Customer Development methodology that launched the lean startup movement, which he wrote about in his book, The Four Steps to the Epiphany. Blank teaches Lean LaunchPad classes at Stanford University, U.C. Berkeley, Columbia University, and NYU.