Oct 23 2017

How Funders Decide: The Big Picture that Startups Need to Paint

A reminder for startup entrepreneurs—all investors are looking for a return, but they probably aren’t looking at your business the way you think they are. You have to paint a picture for them.

The patient capitalists you want aren’t sizing up your company based on your painstakingly drawn estimates of the market or your projected share of it. Contrary to what you may have heard, they know better.

They know that even the most carefully crafted market models are built on highly probabilistic, nested, assumptions, any one of which in its failure to materialize might significantly alter both the opportunity and the means of exploiting it, making your schemes moot. So don’t spend too much time detailing your financials; work a broader canvas. Draw them in to a vivid landscape with you and your company in the foreground commanding attention.

To help my start up clients do this, we work through the Reflective Strategies® “DEALS®” framework. The most visually powerful opportunities are distinguishable, explainable, approachable, learnable, and scalable.

First, make yourself…

Distinguishable

Having would-be competitors can be a good thing; it’s a sign that demand may be building. But how do you differentiate yourself? Most of the time, it’s not with a narrow focus on a new app and its lightning penetration or some equally clever innovation that won’t come safely through the rigors of the market all on its own. Instead, propose an elegant solution to an existing problem: a combination of product, service, brand, and evoked feeling in the customer that generates loyalty, repeat business, and sustainable earnings. Old school, yes, but more relevant than ever. Next, you have to make that vision…

Explainable

You must be able to explain your choices. Perhaps you’ve developed an app in a sticky personal services wrapper to help patients follow medication guidelines, and you’re private labeling your service with a dozen very different looking health systems and payers across the country.

Can you explain this market entry choice when asked whether it wouldn’t have been safer to pick fewer, closer health systems or work with private pay customers? It’s essential that you can by laying out how you chose this market trial strategy because it will help you generate deep customer insights, build operational savvy, etc. Being able to show that you’ve considered your options carefully will help convince potential backers that your goals are…

Approachable

How close can you come to winning the market? At this early stage, investors are looking closely at whether you have a solid value proposition, a handle on the business model you’d use to unlock the market, and the managerial chops to have a greater than even chance of success.

It’s great if you have patented or patentable intellectual property. But what if you don’t (and, frankly, even if you do)? Consider alternative sources of competitive advantage and clearly frame your choices for investors.

  • How about proprietary or first access to strong channel partners offering captive customers?
  • Or corporate partners that will co-promote your product or service along with their own successful brands?
  • Or a “market-maker” like the federal government whose payments will help catalyze spending and underwrite your efforts at demand generation. The US clinical laboratory testing market didn’t begin to grow rapidly until 1988, when Congress passed CLIA legislation, setting federal standards for all human specimens and mandating testing and reimbursement guidelin

Learnable

Now that you’ve shown investors how much you know, show them you’re prepared to learn more as you grow. Choose an initial customer/market focus that will enable you to gain insights and experience safely from your inevitable mistakes. No matter how attractive this first market may be, it’s never smart to try to tackle a sector with so much demand or demand complexity that you can’t properly test and refine your value proposition before any really bad reviews start coming in. Amazon figured out how to deliver books before becoming an omnibus market hub.

Finally, when the time comes to move from your first to your second or growth market (Hint: this is what your Series B and beyond investors will find attractive) you can’t afford to slip too many gears. Your solution must be…

Scalable

Much has been written about the darkness that descends on market innovators unable to produce enough product to meet demand or maintain quality as volume grows. Convince your investors that you understand the need for, and are prepared to invest your energies in, critical scaling capacities now, including leadership, staffing, demand generation, customer engagement, and technology development and deployment.

Building your investor argument around these five elements, confidently animating and giving examples in your pitch, will show a depth of understanding and a breadth of experience that will do more to win investor confidence than even the most compelling and sophisticated projections.