This article has already been published in VentureBeat.
I just had coffee with Mei and Bill, two passionate students who are on fire for their new startup idea. This is the "sketch of the towel" stage with a minimum of viable product and about 100 users.
I thought that they had a good idea of an application space that others had already tried to crack.
But they needed to convince investors that they were Facebook, not Friendster.
Here's what I suggested to them:
Mei and Bill are currently building a better version of a help-on-demand service such as TaskRabbit. And "better" did not do it justice. They have a unique understanding of the nature of the interactions between clients and service providers that I have never heard before. If they are right, they have found a unique combination of customers and a value proposition that have prompted these customers to want to pay immediately and to engage repeatedly. The early indication of their minimum viable product is that they have found early signs of product / market suitability. Even more interesting, their product could have a much larger initial order size and a much longer lifetime value than existing on-demand help services.
All good. So what was the problem?
Their immediate problem was that investors, even seed investors, were convinced that the market segment that Mei and Bill wanted to penetrate was fraught with difficulty. And as soon as they described the space, investors rolled their eyes and passed.
Creative destruction meets venture capital
Like all entrepreneurs who have a brilliant idea, Mei and Bill are the first to invent water, air and fire.
When you are young, you believe that the world was born yesterday (or at least when you started your studies) and that everything that is more than three years old is an old story. Ignorance of the past and contempt for the status quo are part of the innovation process. As companies grow and individuals grow up, most find themselves trapped in dogma and risk aversion. Meanwhile, cultural tastes, technology and platforms are evolving, and new things are possible, which may not have been the case a few years ago. The cycle of creative destruction of the old, replaced by the new, continues, fueled by angel and providential funds.
And this is where the trap lies – investors have more memories of failures than new entrepreneurs. When you describe the future, most of them remember the past.
To see the future understand the past
So, Mei and Bill faced two problems. The first was obvious; they needed to know how investors viewed their space. Secondly, they needed to know clearly that the world had changed and that they had found a way to solve the problems that were causing former candidates. To do this, they had to learn six things:
- Which companies in their space preceded them?
- Why did they fail?
- Which investors were burned?
- How has the market / technology / customers evolved since?
- What is the difference between Mei and Bill and their start?
- Who else plays in their space or in the adjacent markets? And how could they be a strength, not a weakness?
Which companies in their market preceded them? And why did these fail? Which investors were burned?
Mei and Bill needed to understand the past to be able to finance the future. I suggested they do some research by reading public post-mortems from founders and investors about what was wrong. CBInsights has a collection of more than 300 startup crashes on startup, and Crunchbase has a startup startup database. Both of these are compulsory readings. And others exist.
The search for these lists is only the beginning. Since Mei and Bill networked, they would have a lot to learn if they were talking to founders of startups who made similar products to theirs, but did not succeed. I have pointed out that you can get these meetings if you tell them what you are trying to create and let them know that you want to take advantage of them. You will not be surprised how many founders will agree to discuss. (At least those who have recovered.) Ask them, "What would they like to know at the beginning? What did they learn? What would they do differently? And more importantly, "Have your investors understood the space? Did they help to try to find scale? Do you want to take money from them again?
On these same lists (CBInsights, Crunchbase, etc.), keep a list of investors who have lost money on these transactions. Not to avoid them, but to appeal to them when you understand why you will not make the same mistakes or have a better idea. Presenting yourself as a team that has solved a problem they know well may not fund you, but if you get them interested, you'll get a post-doc of the market and the existing space. Your job is to process this information and understand what has changed / what you will do differently to avoid being the victim of the same fate.
How has the market / technology / customers evolved? What is your unique vision? Who else plays in their space or in the adjacent markets?
Once you have grasped the past, you can realize that this is only a preamble to the present.
Create a single slide showing the evolution of the space in which you are. You are trying to show what has changed to make your startup economically viable today. What has changed? Changes from platform (web to mobile), faster technology (3G to 4G to 5G), standardization of technology (Cloud). Has consumer behavior changed? Emergence of the sharing economy (Uber, Airbnb), brands no longer matter (Dollar Shave Club)? All these examples must show that the world (technology and market) is now different – and that the possibilities are even greater.
Finally, given what you have learned about the past, what do you think of the future? What do all these changes mean? What are the basic assumptions about why this is a potentially huge activity?
Understanding how space has evolved takes you from the past to the 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 the adjacent players, they pulled out a reliable XY competition analysis chart, which gave me want to photograph all existing management consulting companies. The graph not only does not say anything useful, but gives Mei and Bill a false impression of not really understanding the space around them.
Instead, I suggested that they start with a petal diagram. Rather than focusing on two dimensions of competition, it allows you to show all adjacent market segments like leaves in a petal.
You label each sheet with the names of the market spaces and the names of the companies that are representative actors in these adjacent markets. You use this table to formulate your first hypothesis of which customer segments you are targeting.
Then follow the petal diagram with another slide that says: here is our unique vision validated by the discovery of the customer. And why the moment has come to seize this opportunity.
If you talk to the right investors, this approach can generate a broadband conversation because you have given them the opportunity to critique your analysis of failures, risks, opportunities and opportunities.
It was a lot of information for a coffee shop and I thought I might have overwhelmed Mei and Bill with a pipe of opinion. But the next day, I received an email saying, "We are there. The first two interviews with our former founders are planned in our space. "
- If you are in a market that has already spent a lot of investors, remember:
- Investors have more memories of failures than new entrepreneurs
- When you describe the future, most of them remember the past
- Eliminate these obstacles by explaining to you and to investors why the time has come
- Carpe diem – Seize the day
Classified in: Customer Development |