Venture Capital Archives - Page 2 of 4

Why startups need to constantly communicate with their customers

October 28, 2013 No Comments

Originally published on Oct 17, 2013 on TNW

A lot of entrepreneurs talk about optimizing their products so they run faster, look better, go viral – but it’s important to remember that none of this can happen unless you are constantly getting feedback from your most valuable asset: Your customers.

During Seedcamp’s recent U.S. trip, we met with many companies like Return Path, Erply, Zemanta, Percolate, OneFineStay, BarkBox, GrabCad, Pinterest, Airbnb, and RunKeeper, to name a few. The consensus from these conversations is that you must continually talk to your customers. Without doing so, you won’t be able to focus on what’s most important: Providing them the value you promised.

In concept, customer communication seems relatively straightforward. But in practice, everyone we spoke with shared that they all experienced varying degrees of difficulty.

Here are the two main reasons why it can be tough to continue listening.

1. It’s hard to tell who you should really please

As a startup, you have the pressure of fundraising and needing to articulate to potential investors a “big vision,” which in many ways can be an extension of your original value proposition. However, that can sometimes lead to an over-extension in order to give the appearance of not thinking too small.

The problem is that unless your customers validate your assumptions shortly after your successful fundraise, you may find yourself going down the wrong path to keep up an “appearance” rather than refocusing on what you know to be the real value to your customer. This may, in turn, burn valuable resources along the way.

It’s a tough call to make, but it is one that could literally cost you your startup if made too late.

2. Not everyone’s needs can be addressed

When you personally believe a product feature or functionality is what will provide value, you may suffer from self-confirmation bias rather than resorting to a real understanding of the needs of the customer. This could result in creating too many features that were requested by your customers (or yourself), thus distracting you from building on the core proposition.

When turning down feature requests from customers, you don’t always have to coldly reject the critique with a big “No.” Rather, as Jason Jacobs, CEO and founder of Boston-based startup Runkeeper suggests, think about whether their comments can be useful in the future, and tell your customers,”Not yet.”

But you still must focus on customer conversations

Continuing to listen is only half the battle. The first half is identifying who your customers are and knowing how to speak to them effectively.

Rob Fitzpatrick’s new book, “The Mom Test,” does a nice job highlighting the methodical process which you can use to avoid the typical pitfalls of customer conversations. This could include confirmation bias and looking for compliments rather than actual feedback. You may think your product is the best thing out there, but be prepared to hear otherwise from the people who matter.

Secondly, it’s important to know who your customers are in the first place. In typical B2C companies, that might be more straightforward, but for non-B2C companies, it can take a little bit more work.

Take B2B2C models for example. These cases pose a unique challenge because it can be tempting to stop short of talking to the end customer and primarily focus on the immediate buyer, partner, or distributor. Don’t forget that the “C” stands for consumer, therefore, it is crucial that the customer that derives most value from your proposition in your marketplace.

In the example of a B2B2C business, you will want to have a relationship with the end customer if you want to keep control of your brand and what it stands for. Your marketing message will likely still have to be targeted to them and you will have to invest in those efforts to reach them, even if there is an intermediary step of the ultimate “buyer.”

Customer conversations should involve understanding the dynamics of both the end user and the B2B side of things. With customers, you must communicate with them to position your product vis-a-vis the competitors. You can do this better than your distributors or partners may be able to, even if they are helping you reach them.

Focusing too much on partners may leave you with a product that the end customer doesn’t care about or is wrongly adapted to their needs because you spent too much time caring about distributors.

Another form of customer conversation that needs to be done in tandem is one that is part of a two-sided marketplace. Yes, it will be twice as much work, but it is necessary in order to make sure you aren’t building an “unbalanced” customer acquisition process and product development. Below are some of the articles that thoughtfully discusses the topic.

Keep in mind who you are talking to

The most complex situation is when the customer is not various individuals, but many people disguised as a single figure. This usually happens in situations where the end user is not empowered to actually make the decision to buy. Rather, there is a series of people within an organization that jointly make a purchasing decision.

In slides 49 to 51, Michael J. Skok has a good break down of what he calls the Decision Making Unit (DMU). He discusses the potential constituents of a DMU, and encourages you to think of them as a unit. This means “speaking to your customer” equates to speaking to all of them as they jointly make the decision. Not all organizations have all the components of Skok’s full DMU list, so it’s just about finding the ones that are required to make a decision – and think of those as the DMU.

After hearing many founders share their stories, it is clear that you need to constantly keep in touch with your customers as you continue to evolve your proposition and maintaining focus on what delivers value. The further you are from the reference customer, the more you need to be mindful of not losing touch with your users and their needs, for that can be fatal in an early stage business.

Investment & Finance

10 Tips for Succeeding in a Startup Accelerator Program

July 5, 2013 No Comments

Article originally published on the SiliconRoundabout on July 4th, 2013

Accelerators come in all different shapes and sizes. With many new Accelerators coming into existence within the last few years, the job of selecting one to join and getting the most out of your chosen accelerator program isn’t always obvious. Some programs, like Seedcamp, cater to high ambition & high growth companies spread across various industries, whereas others focus on specific verticals such as clean energy or healthcare to name a few.

We all have different approaches, but with over 90 companies forming the Seedcamp family we’ve had a chance to see many different industries and what it takes to get those companies to the next level.

Below are Seedcamp’s top tips for succeeding before you enter a accelerator programme:

1) Asses Program Fit – Research what an accelerator’s deal is regarding investment and terms before applying. perhaps your company isn’t ready yet or is too mature for the program you are considering.

2) Do your Due Diligence – Get in touch with founders or mentors that are part of the program, read blog posts from the Accelerator’s team to see what is important for them. This will help you get a better feel for the program but also how the program leaders think.

3) Rehearse your Pitch and prepare to answer questions – Be transparent, confident, and open. If your pitch isn’t ready or you are defensive in your approach, it’ll be a huge red flag.

Once you enter the program:

4) Be Proactive – Don’t wait for the Accelerator’s team to chase after you, you should chase after them and if you can, be as physically close to the team as possible..

5) Understand your startup is more than just tech – Finding Product-Market-Fit is crucial at this stage of the game. Don’t focus entirely on tech, embark on a mission to learn and master all the commercial aspects of your startup as well.

6) Attend as many of the curriculum events as possible – They are there to help you. Don’t skip valuable content.

7) Network as much as possible – email all the people you meet and get to know as many of the Accelerator’s mentor base as possible.

8) Build a board of advisors from your networking efforts early. They will be of incredible value

9) Start developing your fundraising strategy after the first week of being in the program

10) Lastly, don’t be afraid to experiment and ask questions – You will have lots of people supporting you. Your mantra should be ‘test test test’ – and that applies to all aspects of your company.

Investment & Finance, Legal, Sticky

The Basics, Pros & Cons, Points to Consider, and The Modelling of Convertible Notes

June 27, 2013 No Comments

Special thanks to Dale Huxford from Orrick, Herrington & Sutcliffe LLP for edits and additional legal review.

UPDATED (Nov 11, 2013) – Notes added on: Conversion Triggers section & attached Cap Table in folder updated to v2 to fix some bugs.

The “Convertible Note” gets lots of attention in the blog-o-sphere as an alternative to traditional equity financings; some of this attention is good and some of it bad. Some investors refuse to use them, while others love them as a quick way of getting a company the capital it needs.

Convertible notes are sometimes viewed as a “best of both worlds” compromise from both a company perspective as well as from an investor’s perspective: on the one hand, a note is a loan, so the investor enjoys more downside protection than would an equity holder in the event the company is forced to wind up or dissolve for whatever reason; on the other hand, if the company eventually raises money by selling shares to later investors in a typical early stage financing round, then rather than pay back the outstanding amount in cash, the principal and interest are “converted” into shares of stock in the company (usually at some sort of discount off the price offered to new investors – I’ll discuss that below). In other words, the investor enjoys the downside protection typically associated with debt lenders, but is also positioned to enjoy the upside opportunity typically enjoyed by equity holders.

As with any tool, before you use it effectively, its best to understand the pros and cons of each of its features and how they can be used for your individual circumstances. Fortunately, convertible notes typically have fewer moving pieces than do equity instruments (which explains, in part, why they’re sometimes favoured by early stage companies and investors – the negotiation and documentation for a convertible note round is likely to be far less time-consuming and costly than for an equity round), but before we proceed any further in dissecting this tool, let’s look at the headline basics of a convertible note:

1) Total Amount Raised by the Note – This amount does have a natural limit. Think about it this way… you have an amount ‘outstanding on your cap table’, that will be part of an upcoming round. If a new round in the future isn’t particularly big, having too much money outstanding can create a problem with your convertible note holders taking up too large a portion of that round. Example: a 300K convertible which converts as part of a total 600K seed round would loosely mean that the convertible note holders would have 50% of the round. If the round was supposed to be for 20% of your equity, that means your new investor will only get 10%, an amount that may not excite him that much… and also you only get 50% new money in the door. To limit the extreme cases of this being done, investors usually create a ‘qualified round’ definition within the Note’s terms for conversion (see bullet #5 below) which reduces the likelihood of this amount being disproportionally larger than a new investors amount as part of a new round.

2) Discount Percentage – Simply put, if shares are worth $1 a 20% discount percentage would mean that an investor would get the shares for 80 cents. For cases where the next round’s valuation is below your convertible note holder’s cap as set in point #3 below, a discount factor will yield the convertible note holder a marginally cheaper price for having taken a risk on you. Typically this discount percentage is likely to be between around 15-25%. Another Example: a round closes at 3M. Your cap is at 5m. Your convertible note holders have a 20% discount, so they get to convert into the next round at a valuation of 2.4M.

3) Limit On Company Valuation At Conversion (the so-called “Valuation Cap”) – In order to calculate the number of shares into which the outstanding balance on a convertible note will convert, you must know the price at which the next round’s equity securities are being sold. Price per share, as you may or may not know, is calculated by taking the company’s pre-money valuation (negotiated at the time of the equity financing between the company and the investors) and dividing that number by the total number of outstanding shares in the company (the company’s “fully diluted capital”). Recall, however, that convertible notes are typically entered into in anticipation of an equity financing round – thus, at the time a convertible note is issued, no one knows what the negotiated pre-money valuation will be if/when the company undertakes an equity financing. Consequently, no one knows exactly what the price per share will be at the time the notes are issued. This creates uncertainty and is a cause for some investor anxiety, particularly for those investors concerned that that the number of shares into which their note may convert may be insignificant relative to the other shareholders, particularly in the event the pre-money valuation at the time of conversion is especially high.

The valuation ‘cap’ is intended to ease investor concerns by placing a maximum pre-money valuation on the company at the time of conversion. with the use of a cap, an investor can effectively set the minimum amount of equity an investor is willing to own as part of having participated in your convertible note round. For example, if you have a 200K note on a valuation 5m cap, then the worst case scenario for that convertible note holder, would be 4% equity after the new round is over. A typical valuation cap for very early-stage companies will be around $4m – $6m, with most companies at the Series A level settling on $10m valuation caps or more. For more statistics on caps and other components of a convertible note, I have included a link at the bottom of this post to an article with additional stats.

One thing to note, is that in the USA, there is a rising prevalence of uncapped notes. Clearly this is a founder friendly outcome, and if possible, always nice to get. The flip-side, is that for the investor, the may feel a bit ‘unprotected’ in the case of where the company does exceedingly well and thus their amount converts to a much smaller percentage than originally hoped.

4) The Interest Rate on a Note – A convertible note is a form of debt, or loan. As such, it usually accumulates interest, usually between 4-8% between the point when you sign it and when it converts. This amount is usually converted as part of overall amount at the next round. For example, if you have an annual interest rate of 8% and you have a Loan Note of 100, then you’d convert 108 after a year.

Note: In the US, it’s highly advisable to include an interest rate, even if it’s simply a nominal amount equal to the applicable federal rate (most recently at less than 1%), b/c if not, then any amount that could have been earned via interest is taxed to the company as gain. So it’s not really an option to exclude it in the USA. In the UK, you don’t necessarily need to include it should you wish to omit it.

5) Conversion Triggers – The point of a convertible note is for it to convert at some point in the future, not for it to stay outstanding indefinitely. As such, it will likely have a series of triggers for conversion. One I mentioned earlier is the next ‘qualified round’. Basically this means that the round is big enough to accommodate the amount in the note (without washing out new investors) and also is the type of round that is typical for the next step in the company’s growth and will give the note holders the types of rights they’d expect for their shares once converted from loan to equity. Another conversion trigger is an expiration maturity date, whereby the note holder typically can either ask for their money back (although this rarely happens) or basically seek to convert the outstanding amount at that point. There are more types of conversion triggers that note-makers can add to a note, but these are the basic ones. Update: upon a change of control event in the future and before the convertible is converted, investors can sometimes ask for a multiple of their loan back as payment in lieu of converting to ordinary shares prior to the completion of the change of control event. You can see some examples of this in the wording of the attached examples later in this post.

Again, these are the headline terms of a convertible note, and not representative of all the terms. However, for early discussions with potential investors, you’ll rarely have to talk about anything more than 1-4. Beyond that, you usually start having to involve lawyers (or experienced deal drafters) to help you finalise the document.

Now that we’ve reviewed the basics of a Convertible Note, take a look at a recent report that has statistics of what common terms have been given to Valley based companies. If you are not in the Valley, you will likely have a different set of averages, so be mindful of that.

http://www.siliconlegal.com/reports/seed-financing-report-2010-2012

Now, let’s look at the headline pros and cons of using a convertible note.

Pros –

Typically less involved and less paperwork than equity rounds; can cut down on time and legal fees
Investors enjoy downside protection as debtholders during the earliest stages of the company when company is at critical growth stages
Company can defer the negotiations surrounding valuation until later in the company’s lifecycle (i.e. for very early stage companies at the earliest stages of planning and preparation, valuations can be more difficult to define)
At conversion, note holders typically receive discounts or valuation caps on converting balance, thereby rewarding the earliest investors appropriately for their early investment in the company but without causing valuation issues for the company

Cons –

If a convertible note is made to be too large, it can negatively impact your next round because it’ll convert to a disproportionally large portion of your next round, effectively crowding-out your next round’s potential investors from having the equity stake they may desire.
If a convertible note’s cap is made too low, in order to accommodate a larger round later, the Founders may need to take the additional dilution that would happen if they exceeded the convertible’s cap.
Because a convertible note can be made to be quite versatile, sometimes investors can add clauses in there that have greater implications down the road, such as being able to take up more of a future round than the actual amount they’ve put in, for example.
If not careful, you can accumulate various too much convertible debt which may burden you at a conversion point
Doesn’t give your investors (in the UK) SEIS tax relief, thus making it less attractive than an equity round. There may be some workarounds, but generally SEIS and Convertible notes are not seen as compatible.
Notes give convertible note holders the investor rights of future investors (say in a future Series A Preferred Shares), which may include more rights than those they would take for the amount of money they put in had they simply done an equity deal on Ordinary Shares with you today.
If the convertible note automatically converts at the next equity raise (i.e. the investor has no choice), investors may wind up being forced to convert into securities shares despite not being happy with the terms of the equity financing. The note holders may unfortunately have less influence in negotiating the terms of the equity financing, which partially explains why some investors are reluctant to invest with convertible notes.
Finally, while convertible notes allow the company to defer the valuation conversation until a later time (see discussion under “Pros” above), any inclusion of a conversion cap will raise a similar conversation, which defeats some of the purpose for why companies and investors alike originally favoured the convertible note as a quick-and-easy financing solution to begin with.

Now let’s explore a few more core concepts in detail.

Seniority – A convertible note is a form of debt or loan. Although its not too common to hear about investors asking for their money back, they in fact, do have that right… additionally, one of the privileges that having the Note act like debt is that it acts senior to equity in the case of a liquidation. What this means in practice, is that Loan holders will get their money back first.

Subscription Rights – Some investors like to have more equity than their invested amount would likely yield them upon conversion. So one thing to look out for is how much they want to take up of the next round as part of having been in the convertible note. Example: An investor gives you 50K, which converts at your next round of 1m on 2m Pre at 1.6% -> next to nothing for the convertible investor. However, that investor had a Subscription Right for up to 30% of the new round, so that allows him to participate on the 1m round with up to 300K thus affording him a larger ‘seat at the table’ in excess of the 1.6% he would just have without this right.

To conclude and to provide you with some practical examples, in the following Google Drive Folder I have added an excel sheet with an example cap table as well as UK & USA termsheet templates from Orrick* that are uberly simple, for review purposes only (they may not be fit for what you need, but give you an idea). A comment on the example cap table – it isn’t designed to be ‘fully realistic’ per se, as in, your cap table will likely not look like this in terms of founders and shareholders and number of rounds before a convertible comes in, but it serves well for you to play with the variables that make up a convertible note so you can see how they affect your fully-diluted stake after a round.

I hope this helps you decide what the best options may be for you. As usual, please give me feedback on all these materials as with software, there are likely bugs somewhere!! Thanks in advance!

*Regarding the Convertible Note Documents, a disclaimer from Orrick: The linked documents have been prepared for informational purposes, and are not intended to (a) constitute legal advice (b) create an attorney-client relationship, or (c) be advertising or a solicitation of any type. Each situation is highly fact specific and requires a knowledge of both state and federal laws, and anyone electing to use some or all of the forms should, prior to doing so, seek legal advice from a licensed attorney in the relevant jurisdictions with respect to their specific circumstances. Orrick expressly disclaims any and all liability with respect to actions or omissions based on the forms linked to or referenced in this post, and assumes no responsibility for any consequences of use or misuse of the documents.

Marketing, Product Market Fit, Sticky

The Product / Market Fit Cycle

May 3, 2013 No Comments

Product / Market fit can be loosely defined as the point in time when your product has evolved to the point that a market segment finds it attractive so that you can grow your product / company scalably. In many ways, finding Product Market fit quickly allows you to focus on company growth rather than spending a lot of time and money on iterating your product to find that fit. Many companies linger in that limbo for quite some time unfortunately. Without this product market fit, it’s hard to inject nitroglycerin to generate the desired growth rate that all investors want when they invest.

Having spent time with several companies that have gone through the process of finding product market fit, I have observed that many get hung up on iterating only the ‘product’ part of product / market fit, rather than thinking of ‘product’ in a larger context. Speficially, the three things I notice are being omitted by several companies that have been religiously using the “Lean Methodology” product dev model alone to achieve PM fit, but failing to find it are:

1) A definition of a Minimum Viable (customer) Segment – As originally defined by Michael J. Skok
2) The testing of a well thought out positioning strategy alongside the testing of an MVP
3) The testing of a complimentary go to market / marketing strategy that tests your product vis-a-vis the chosen positioning strategy above

If you think of the three above as a bullet, visualise them as the lead pellet (product), the shell (positioning), and the gunpowder (go to market) that makes a bullet work. They only work when tested all-together, not separately. Testing only the lead pellet, doesn’t get your bullet very far.

In order to fit these three points into a more familiar framework, I have borrowed the Lean Methodology’s Build-Measure-Learn loop and expanded on it to create a larger loop designed specifically to help guide you achieve a series of test loops to achieve product/market fit. This isn’t perfect (and would appreciate any feedback on how to improve it) but I figure it’ll help provide a framework by which to test all in conjunction.

Here is the Product/Market Fit Cycle Model I propose (see attachment for illustration at bottom of post):

Start with a Product Hypothesis / Idea

This is effectively the way YOU think of your product the day you conceived it.
This should also have the rudimentary aspects of a defined value proposition for a set of customers.

Identify a Minimum Viable Segment (Customer Base)

The concept of an MVS comes from Michael J Skok’s observation of one of the flaws of the standard Lean Model. You can see his work on this here: http://www.mjskok.com/resource/gtm-segmentation. In summary, a Minimum Viable Segment allows you to test your product on a focused segment rather than leaving it too open ended across several segments, each giving your potentially different outcomes. The benefit of identifying a minimum viable segment is it allows for better differentiation of your product within your market segment, thus, you get easier referrals from this group as well as more efficient use of capital to acquire them.

Questions to ask yourself as you define your MVS:

*Who are my potential customers?
*How do I find them? (which blogs, which media, which social networks, which retail locations, which distributors, etc)
*What will they be willing to pay? (you may not know this off the start, but you’ll be able to determine this as you test it in the next step)

Build a Minimum Viable Business Model

The Business Model Canvas helps a lot in identifying a lot of the components needed for a fully operational Death Star, but what we are trying to test here is more ‘does it work’, rather than filling in all the components of the Business Model Canvas too early, and which you may not know at a start.

The three parts to the Minimum Viable Business Model include: A positioning strategy, an MVP, and a Go 2 Market Strategy.

*Build a Positioning strategy

As you create your positioning strategy, make sure it will resonate with your MVS and product hypothesis, or otherwise iterate these so that they are harmonious with each other. No point in having your positioning not be something that your MVS values, for example.
If you are not familiar with what a positioning strategy is, read the following book, it is the gold standard: Positioning by Jack Trout & Al Ries

*Build an Minimum Viable Product that fits the above positioning strategy

Most tech founders generally rock at this bit, so nothing I can really add here. However, take a look at my previous post on growth hacking summarising Traity’s experience in optimising their product to yield better conversions if you want to optimise your product for growth and reduce the potential of your product getting in the way of conversions: https://thedrawingboarddotme.kboirhc1-liquidwebsites.com/2013/04/15/on-growth-virality-loops-and-customer-acquisition/

*Build a Go 2 market strategy

A Go 2 Market Strategy is, simply put, a strategy that attempts to cost-effectively deliver the value proposition to the selected target segment(s). It is a strategy to help get the product or service out in the marketplace and includes pricing strategies, sales strategies, and marketing methods (internet marketing, direct marketing, PR, etc). It can include things like identifying key distribution channels and key partnerships required to get your product to the identified minimum viable segment. Clearly this will be different for B2B companies than B2C companies. The aim is to build a Go 2Market strategy that targets you MVS with your selected positioning strategy for best effect.

Once having completed and packaged the above three in a minimum viable form, assign a “cost” (what money you are going to spend on validating it) to the combination and set some expectations around target figures upon which to analyse your resulting metrics. How many users are you expecting, what constitutes an ‘active’ user? A churned user? A conversion? etc. Effectively, you want to have ‘targets’ for what you experiment will yield.

Test & Measure

As you know, a key part of understanding forensically whats happened after a test, you will need to have set up good tests to start with and also adequate data. A good book on this is: http://leananalyticsbook.com/ I’m in the middle of reading it, but so far it seems in line with what I’ve seen several startups doing.

Tests will include quantitative (Kissmetrics & http://newrelic.com/) and/or qualitative tests about how the product is perceived based on people that didn’t activate. Using the output from your tests find out how your users are behaving to gain intelligence.

However, keep in mind that testing will be different between the different phases of startups in how you can test. In the words of Andreas Klinger (co-founder of Lookk):

I personally see product dev as a spiral. The further you go outside (mature) the more quantitative your approaches can be, the further you are yet on the inside the more qualitative. You repeat the same phases (build,measure,learn etc) but you use different tools.

Most startups are in that inner core of that spiral but play games of outer ends. We can call this premature scaling or just inefficient behaviour (e.g. using metrics when there is no clear data). Many product hypotheses/ideas and especially customer segments can already be eliminated very cheaply before MVPs – eg by qualitative approaches (eg customer interviews).

Metrics are for me personally a bit further down the spiral.

Once you go down the path of metrics, use the Pirate Metrics framework (summarized below) to forensically analyse why (http://500hats.typepad.com/500blogs/2007/09/startup-metrics.html) –

* Arrivals & Acquisition – How many people landed on your website coming from a marketing campaign that you are tracking and then you acquire the user. For a SaaS product, this usually means a sign up.
* Activation – The user uses your product.
* Retention – What is your churn? How many of the users you have in your userbase are active? How many stopped being active and why?
* Referral -How many of the users that are using your product are willing to refer to others?
* Revenue -How many users are willing to pay you of the ones that are using the service?

Learn/Debug your Minimum Viable Business Model (MVB – yeah ok, too many MV* acronyms, but too long to spell out)

Questions to ask yourself as you are reviewing the metrics:

Are you having high arrivals but poor Acquisition/Conversion? – Perhaps your Positioning is working, but your product isn’t living up to expectations. Think about this as you talked about a great party but when people showed up they thought the party (product) was lame.

Are you having high acquisition/conversions but poor arrivals? – Perhaps your positioning/marketing strategy is not working, and for those few people that are in your MVS that land on your site by luck, convert because they find the product useful. Perhaps you didn’t allocate enough cash to your Go 2 Market, or rather the cost of acquisition of the chosen MVS is higher than expected so you are just aren’t getting enough eyeballs on the site, but when they do they convert.

Are you having so-so arrivals, and acquisition at your target figure? – Perhaps your Go 2 Market strategy is not cost effective, or you didnt find the most efficient channels. Perhaps you didn’t allocate enough money to the Go 2 Market strategy.

Are you having high Arrivals, high Acquisition & Activation, but poor Retention? Then likely your product is failing in delivering ongoing value. There is something wrong with it. Use product analytics to find key churn out points and qualitative studies to find out what is pissing people off.

Are you having a hard time monetizing? – Perhaps there isn’t enough value in the product hypothesis for the MVS if you can’t get anyone to pay even if they are engaged (not enough of a pain).

No referrals? Well, likely a function of the above as well. Perhaps you haven’t build enough virality into your product (see Juan Cartagena’s work on this).

Decision point & New Ideas

Now that you have the output and a series of metrics and potential red flags as to where things went wrong.. you can consider various options before you go through the loop again:

Do I iterate on one of the factors of the Minimum Viable Payload? (try a different positioning strategy, go 2 market strategy, or product revision?)
Do I pivot to a different product hypothesis?
Do I pivot to a different minimum viable segment?

In conclusion, I hope you find this framework useful in helping you diagnose what you should try out. Let me know what you think and if you’d add/subtract anything to it.

Click here to see the full diagram of the Product / Market Fit Cycle.

Here is the video of a variant of the presentation:

Here is the updated slide share of a recent presentation I gave on the subject:

Here is the legacy slide share the presentation:

The Product Market Fit Cycle from Carlos Espinal

Investment & Finance

What the VCIC can teach us about Finding Good Investors.

March 27, 2013 1 Comment

Finding an investor for your startup is hard, and as I partly covered in my last post: What Tier is your Investor (or what to look for in an investor)? It involves taking a lot of meetings and dealing with a lot of rejections while at the same time ascertaining how much value-add the investor you are speaking with will provide, above and beyond their investment.

Last month, I had the pleasure of judging my local VCIC event at the London Business School and it reminded me of the importance of the symbiotic relationship between investors and founders. The Venture Capital Investment Competition (VCIC) is a competition for MBA students aspiring to become VC’s after graduation or trying to better understand the investment process for when they start their own companies. The competition is about how well they analyse a business opportunity and then recommend and close an investment with the founder of that opportunity. It’s a great experience. Probably one of the best experiences to get a business student a feeling for how the entire academic body of knowledge comes together into evaluating and investing in a company. If you are currently doing your MBA, you HAVE to do this if you really want to exercise what you’re learning across all of your classes.

More than 8 years have passed since my personal VCIC experience as a participant, but I still remember it vividly to this day. Since then, I’ve had the pleasure of judging it every year thereafter and seeing many MBA teams go through the process and trying any number of things, ranging from the silly, to the creative in their attempts to out-do their competing ‘VC Firms’ to secure an investment-agreement with one of the presenting founders (which, btw, are always real-live companies). Every time I judge this event, I’m reminded of how important it is for founders to not only find the right investors, but also for investors courting a founder to demonstrate their value (their ‘tier’ so to speak).

During my judging of these events over the years, I’ve noticed there are six key areas that differentiate the best VCIC teams (read: VC firms) from the worst (both from the point of view of the founder and the judging VCs). These are:

* The best VCIC teams build rapport with the founders & ask the key questions – Sometimes as an investor you have to ask difficult and probing questions. Some are questions that signal your doubt on a current company strategy or perhaps on how the company’s thinking revolves around any operational area. As the VCIC teams ask questions to get these answers and better understand the founding team’s thinking, they need to do so while at the same time respecting the founders and not making them feel like they, just because they have money, know it all, for no one does, no matter what their experience. I consistently saw VCIC teams failing in this area, but a few that really stood out made an effort in asking questions not from a position of patronising the founders, but from trying to understand them and dig into the right issues.

* The best VCIC teams understand the opportunity & dig only into the right issues with their time– Doing your homework is an important part of any mutual discussion. Some VCIC competitors haven’t even looked at the product that the company makes. The VCIC teams that fared better were the ones that, logically, didn’t get hung up on semantic arguments, but rather dug deep into any number of issues that are important. As a founder, you know what are your biggest challenges. If an investor identifies those as well, particularly without you spoonfeeding them on it, that’s a good thing and bodes well for having them on your board. As an investor, don’t show up unprepared and pretend like you can make up for it by picking up a trivial argument. In the competition itself, sometimes you have to dedicate your time to researching a specific company at the risk of showing up unprepared to interview the companies that you are not interested in for investment. This counts against you, so keep that in mind. In real life, as a VC, its as if you took a coffee meeting with a founder, and then were rude to them.

* The best VCIC teams demonstrate value to the founder – One of the things that VCIC teams have to do when they are asking questions of the startups, is explain who they are. In the context of the VCIC they can fictionalise their ‘fund expertise’ since none of them are running real funds, but part of this exercise is also marketing the right attributes vis-a-vis what the startup team needs. For VCIC teams where a resident expert exists it can be useful, but also consider that you can showcase value by bringing in the right people external to your fund to help the company along.

* The best VCIC teams demonstrate an understanding of the financial requirements of the company – Some VCIC teams fall short of true analysis and research here, they just take whats given to them. Sometimes they underfund companies and sometimes they over-fund the companies as part of getting their numbers to work. There is probably more to say on this point than can fit into this post, but what I’d recommend is that the VCIC teams explore proxy companies in the market and truly understand the impact of offering too little (or too much) to the company. One point on VCIC valuations: Teams, DCFs don’t work well on companies that don’t have historic data!

* The best VCIC teams don’t overcomplicate their termsheets – First of all, if you are a VCIC competitor, you should familiarize yourself with actual termsheets, and word of advice: keep it simple. Check out the Series Seed docs for the USA and the Seedsummit Docs for the EU as a starting point. Secondly, as a VCIC participant (and real investor) keep in mind that term sheets can actually signal quite a bit to the founder of what you think of them and that this does have an emotional impact on the founders. Do they have too many control provisions, for example, or are the economics of the deal indicating some concern? While supervision isn’t necessarily bad, as a founder, the smart thing to do is ask what the investor’s expectation is engaging with founders post investment. Are they meddlesome, for example? Are those control provisions there to protect you or are they draconian in how they operate? Ask to speak to the CEOs of other portfolio companies of theirs. Regarding the economics of a deal, perhaps the economics imply that they think you are overpriced. Ask them to walk you through how they came to that value and why. As a VCIC team, be mindful that overly complicated termsheets can come back and haunt you by providing perhaps too many mixed messages to the founders. As a founder, push back on items that don’t make sense.

If you are a team about to participate in the upcoming finals, I wish you the best of luck. If you are a founder, keep the above points in mind when you are doing a review of your investors-to-be. As for me, I look forward to continuing to be part of the VCIC experience in the future, I always learn a ton and am continuously impressed what teams achieve in such a short amount of time. I find that every time that I judge it, I’m reminded of the delicate interplay between investors and founders and how trust needs to be built over time.