I spend a lot of time talking about business opportunities through my work with Contrary. I’ve noticed that many first-time founders forget to cover certain topics in meetings and pitches. If you’ve been thinking about a startup for a long time, non-obvious ideas become can so ingrained in your head that it’s hard to articulate the assumptions you’re making. This is a list of things that VCs consider when analyzing a venture opportunity’s product and market—make sure to touch on each when talking with a VC.
- Why now? Think about where this product/market is on the S-Curve. Company should have recently become possible (but not prevalent) because of a new market trend or tech innovation. Unfilled niches are short lived but being too early is very costly.
- What’s the initial niche? No valuable market is entirely unfilled. There must be some specific niche that can be won over. It’s important that the company provides something 10x better than existing products/services. (Side-note: the degree to which the startup has to be better is directly related to how much they have to change existing customer behavior). Example: Amazon originally focused just on books and made the customer experience convenient and low-price in a way that bookstores fundamentally couldn’t match.
- Can you grow from that initial niche? Remember that the initial niche is just part of the plan to solve a bigger problem in a bigger market. Example: Amazon used its bookstore cash, workforce, technology, and processes to expand into other retail markets.
- Is the product/service defensible? There should be something that prevents competition from changing their product or using their resources to create a new product. This is often legal (patents), social (network effects), economies of scale, informational (data that’s valuable across different products), or strategic (example: Facebook struggles to take on Snapchat partly because everything FB contradicts Snap’s core privacy values).
- What metrics and KPIs will show that you’re growing? Metrics are necessary to make sure growth is on track, and execution should be focused on improving the most important metrics. (How did the company decide which metrics to focus on?)
- What de-risks your assumptions and bets? Assumptions are pretty much the entire foundation of an early-stage startup’s game plan. Being able to quickly prove or disprove assumptions will give founders a more clear picture of reality.
- How are you going to make money? There should be some sort of exit strategy or long-term profitability goals. Is the revenue stream recurring, network/data based, etc?
- Why are competitors doing X and not Y? There should be some analysis of how competitors’ strategy and execution interacts with available market opportunities (related to Peter Thiel’s Secrets — things you know but no one else does).
- How is the market growing? Both growth rate and change in growth rate are important for a founder to know.
- What are your current bottlenecks / resource constraints? This ties in to your roadmap and execution strategy. Have you thought deeply about what’s important to get done and what can wait?
- What have you learned from users and how has that informed your decisions? It’s important to understand what users need and how you can better serve them. Do you look at new users by cohort? Have you segmented users based on any patterns?
Note that every answer to these questions does NOT have to be perfect. Part of analyzing a business is finding the flaws (there’s always at least one) and thinking about how it can be overcome or compensated for. Don’t sweat it too much if you can’t find a great answer to some of these questions.
Part 2: Thinking About People is now available!