Sunday, October 12, 2014

Six Steps to The Maximum Desirable Customer

By Christian Dahlen & Oana Olteanu


Technology startups and mature companies alike know that building successful products requires a close collaboration with the customer. Steve Blank in particular has championed the idea of the Customer Development where startups can systematically improve the chances of product success by developing a better understanding of their customers.

So why is it that so many startups still end up in the product graveyard, need to pivot after significant development investments have already been made, or, even worse, gain only a handful of customers and join the living dead?

Much has been written about the Minimum Viable Product. Based on our experience with startups and large companies in the enterprise software space, there seems to be a common theme: Not picking the ‘right’ customers and not spending enough time with those customers from the beginning is likely to cause damage which proves irreparable.

Here then are six steps to finding the Maximum Desirable Customer
  • Profile and qualify your initial customers. A startup need to have a crystal clear hypothesis about its product target audience, unless it wants to be at the mercy of random customers with ulterior motives. Early customers in particular may simply want to use the start-up as an extended development bench, and that hidden agenda is easy to overlook when a startup is hungry for first customers.
    Two caveats are particularly noteworthy: A mature company with existing customers needs to watch out for Christensen’s innovator’s dilemma and actively seek new users, buyers and partners. And everyone likes to brag about Fortune 50 companies as customers: However, these sought-after brands usually have the most complex requirements that far exceed a Minimum Viable Product.
  • Validate problems/solution with all your channels. It may be comfortable to validate your product with the initial and existing customers only. But the reality of today’s channel landscape is complex and imposes product requirements on your product from day one. Involving partners early will also prepare the ecosystem when the product is finally launched.
  • Talk to all of your customer stakeholders. The buying decision is never influenced by one person only. One must ensure that each layer of customers wants to hire the product for the job that they have to do: The end user needs a great user interface and a necessary and sufficient set of functions. The buyer has to weigh competing priorities, and may have a different job for which he might want to hire the product for. Other stakeholders in IT and in finance may have the final budget authority. There is a whole ecosystem around these stakeholders who influence the buying decision.
  • Solicit active feedback from your customers. It may be very comfortable for both parties to have the product team broadcasting what they plan to do. But shouting out and not getting an engaged response is a clear warning sign that things are not going well. If in doubt, make sure to engage with the business users.
  • Find a stable use case and persona. Working with only two or three initial customers only is a risky undertaking. A customer advisory council helps build a stable persona that survives even if some initial customers decide to drop out. Moreover, the more customers are involved in defining the persona, the higher the chance of catching the common traits and building a true Minimum Viable Product (MVP).
  • Build a low fidelity Minimum Viable Product for customers requiring the least amount of features. Now that the ‘right’ customers have been picked, comic book type storytelling and simple proof of concepts can save the startup from wasting months of development work and having to start all over again.

In a nutshell, the time spent with future customers before beginning a massive development effort is time well spent. Following the six simple rules to finding the Maximum Desirable Customers ensures that the right customer pipeline is built from the start.

Photo credit here

The Future of Venture Capital - Of Startups, Seed Funds, and Limited Partners

The annual PreMoney conference in June 2014 was themed ‘the future of venture capital’. One topic of discussion was the proliferation of angel investments and seed funds.
1. How to find the right match between startups and angel investors?
2. How do angel investors decide where to invest?
3. How should Limited Partners decide which seed funds to invest in?
Investors and startups should fall in love.  Elad Gil looked at the two sides of the angel investor - startup relationship. For a startup to fall in love with an angel investor, an angel can do several things to help the entrepreneur: making introductions to the network and providing access to privileged information, offering support like CEO dinners, and being available and discrete.
Investing requires to be principled. Elad suggest the most important criterion for angels to invest in a startup should be the market - as Andy Rachleff said, the market always wins, and the only way to make money is to be contrarian and right. Companies such as eBay and AirBnB were initially considered overvalued and are in fact perfect examples of those criteria. Jeff Clavier from Softtech VC added his key criteria for investing
  • Do I like the founders? Are they a good fit for the category? Do the founders know what they don’t know?
  • Am I passionate about the product? Do I love this deal? Every new piece of information in the course of due diligence should make you more excited.
  • Is it fundable in 12-18 months?

He strongly suggested to invest if the founders are legit and the referrer is respectable. He also advocated building a strong investor syndicate to help fix the founders shortcomings, and to avoid the party rounds where no one is responsible.
Elad also offered suggestions how to avoid the trap of becoming a bad angel: re-inventing yourself, building networks and knowledge for your company, and focusing on things you can uniquely help with.
Network centrality and follow-ons distinguish seed funds. Limited Partners get inundated with pitches from 50+ new seed funds which have been created in the past years. The Limited Partner community cares about these MicroVCs, but needs help to understand which funds have deal flow and syndication. Jeff Clavier pointed out the importance of having a ‘shtick’ - a differentiated strategy by geography, sector, infrastructure, ecosystem, value add - to  distinguish from the hundreds of other MicroVCs. Anand Sanwal from CB Insights provided quantitative insight on the relative attractiveness of the funds and general partners
  • Network centrality: Google PageRank for investors, and to high quality investors. Three of the top six leaders here are also members of Y Combinator: Alexis Ohanian, Max Levchin, Gary Tan, Marc Benioff, David Tisch, Paul Buchheit.
  • Syndication and follow-on investments: Who invests afterwards provides more confidence. Follow on rates are highest for seasoned investors and entrepreneurs such Bobby Yardani, Larry Augustin, Matt Coffin, Gil Penchina. As an aside, CB insight found that VC involvement in seed rounds creates more follow-on funding.

None of the funds have a track record yet, and similarly, neither do many of the fund’s general partners. But the analysis promises to be an indicator of future success.

How To Become A Super Angel, Part Two: How To Spend It

In the first installment on how to become a super angel, we reviewed the seven steps to achieve liftoff and raise the first outside funds. This second installment takes a look at the subsequent evolution of the super angel cohort.

  1. Put the outside money to work quickly. A $10 million fund will spend $4 million over the first two to three years, and keep $6 million in reserve for follow-on investments. The $1 - $2 million annual spending can still be used to pray and spray approach, but, more likely, the angel will write bigger checks to double down on initial investments. Given that the angel has made a significant number of investments over many years, deal flow should not be an issue. And if it is, there is always the option of creating one’s own accelerator, or leverage AngelList.
  2. Increase the investment size.  At this stage, super angels typically still invest on their own time. Previous investments are taking up some of that time, and therefore super angels will very likely have to increase the size of their investments going forward. However, angels typically still do not lead investments and don’t take board seats at this stage. Their ability to provide timely advice may also be impacted.
  3. Raise the next round. To take advantage of the momentum and the afterglow of the early successes, angels again need to raise as quickly as 18 months after the first round.

  1. Hire some junior partners. Now that there is more money to spend, there are many more investments to be made. At this stage, the super angels run out of time and need to start leveraging their time.
  2. Create a following among VCs. An analysis of micro venture capital firms by CB Insight shows that many investments of Chris Sacca’s LowerCase and Aydin Senkut’s Felicis Ventures are followed by blue chip venture capital firms. On their web site, Felicis notes that they have had 51 notable exits, evidence of an angel investor who he is highly networked with venture capital firms and with serial corporate acquirers such as Google and Facebook.
  3. Adapt the business model. Quo vadis, super angel?  
  • Become a micro/boutique VC. The bigger micro VCs like SoftTech VC and Felicis have raised in excess of $100 million and seem well on their way to becoming a traditional venture capital firm. Because they now lead rounds and are board members, they have hired and promoted additional partners.
  • Build an accelerator. 500 Startups in particular has combined an accelerator with seed, early stage and later stage investments. Dave McClure has put in place a whole ecosystem of investments, events and global sourcing of entrepreneurs.
  • Stay small. K9 Ventures seems to pursue this path where Manu Kumar remain a sole operator of a $40 million fund. According to Crunchbase, K9 has made 32 investments in 23 companies as of October 2014, two years after raising the second fund.
  • Be opportunistic. Chris Sacca of LowerCase has been a master of doubling down on prior investments and leveraging his network. He first raised an $8.5 million fund from high net worth individuals he had built real relations with, and then raised additional funds just to buy Twitter shares as people were leaving.
  • Start a syndicate on AngelList. Jason Calacanis and other angels have used their network and name recognition to launch nano funds. The committed amounts are still significantly below $10 million, but can eventually lead to larger investments from Limited Partners.
There is no public information available about the performance of any of these super angels and their funds, many of which are still relatively young. There is some anecdotal evidence that the returns of some the funds are below the water mark, but similar to venture capital firms, success stories tend to be told and re-told, and losses swept under the rug called survivorship bias. For the time being, proxies like the CB Insights network centrality and investment follow-on analysis have to suffice to provide Limited Partners with insight about the potential returns of these newly minted super angels.