When do high-growth startups become superior to competition? On Day One.
Ever get a Series A VC Kiss of Death? This May be Why.
Raising your first major round of financing is a tough call of duty. Especially when this happens:
You’re 10 minutes into your presentation. You pitched your team, a big market to go after, key customer problems to solve, and your Big Idea to fix them.
Suddenly, the potential investor’s eyes move away from yours and drop down to glance at their text messages. Something now more important than you.
You keep presenting, although distractions continue and questions back to you are minimal. Body language suggests —they will pass on this round. You did not get them @Hello.
The Series A VC “kiss of death” usually follows and comes before minute 20. It seems harmless enough. It comes within the context of a pleasant, respectful, and seemingly positive phrase.
It’s a single word.
Thanks for the overview. I am intrigued.
Intrigued? Any word but that one.
Sounds kinda promising, right? In my experience…it’s not. Intrigued is more often the polite investor synonym for lackadaisical interest, highly unlikely commitment, and insider code for unimpressed. They may like your basic idea, as well as you and your team, but the bar is set much higher than that.
Knowing that 75% of U.S. startups fail, while investing in <1% of the deals they see, VCs reserve their unbridled enthusiasm for the very, very few. They are high-risk investors, after all. Money goes to those who can prove they deserve, not to those who intrigue.
Intrigued? That’s a common word for the many, and it looks like your pitch was D.O.A. @ minute 10.
Why did this happen so fast?
There could be many reasons why you ended up stuck within the realm of VC intrigue. Already well aware of your specific industry sector and other competitive solutions in the space, one big reason could be that — VCs just don’t think you can win. They Don’t Think You Will Be Better.
CB Insights has recently published that 42% of startups fail because there was “no market need” for their product or service, and 19% also fail because they were “out competed”.[1] Taken together, what really matters is that:
Your new business will solve big and, more importantly, proven unmet customer needs.
You will need to be better than your competition. Ones there now + others soon to come.
We believe your startup should be grounded with a far more powerful strategic foundation, built up from the kind of intrinsic competitive advantage that can only come from deep customer understanding and iterative market testing. We call this The Basis of Superiority, your first real measure of potential venture success.
Your first true milestone.
The Basis of Superiority
Running a high-growth startup benefits greatly from a heart full of passion and a soul full of humility. But…it also requires the objective and calculated mind of a category killer. Sophisticated investor dollars gravitate toward the latter and its more credible promise of future market superiority.
Winning in the marketplace will require a truly superior solution that will take business away from any existing and upcoming customer choices. Your idea might be new, but customers are already buying something that at least partially fills their unmet needs. Those existing customer choices, habits and practices may not look like much to you now, but beware — they are already well entrenched and tough to budge.
You need to move them away from their risk-averse complacency. You need to demonstrate that you have something really different and truly better.
Fortunately, just like in The Matrix, the marketplace always leaves open a door for The One. The one that’s better. The superior solution.
There are 3 critical components required to develop an early Basis of Superiority for your startup. This won’t be all you need to win in the market yet, but here is a place to start.
Pick the First Mainstream Micro-Target to Focus On. Of all of the customer segments within the large market you have chosen, which specific segment’s unmet needs will you target first? Which specific demographic and customer persona? This is your first Micro-Target, or T1. Find out who they are, study them, talk to them, and focus all of your energy on pleasing them.
Your first target customer must come from within the Early Majority of the mainstream market[2]. We are not talking about technology-driven Early Adopters here. We love them, but unless EA pain points are consistent with those of the mainstream, they can lead to false positives and inaccurate projections.
Discover Big, Unmet & Quantified Customer Needs. You need to discover, measure and then quantify that there is a gaping need hole in the T1 market. You must research the breadth and width of that big solution value gap in the marketplace and then validate that it is currently unmet by existing competition.
Obtain Sustainable, Competitively Advantaged, Intellectual Property. Ideally, you already have some vital assets that no one else does. They should be seminal to delivering your superior solution. It could be a pending patent, trade secret (see algorithms), proprietary data access, exclusive partnership, etc. Sometimes, your team is so truly extraordinary that they are also IP (see advanced artificial intelligence). There’s nothing quite like coming out of the blocks with in-house competitive advantage.
How to Discover Better
What if you’re not there yet? Getting to Better requires a deeper dive into the mindset of your customers and their current choices of consideration. This exercise benefits greatly from the art and science of unbiased human behavior research combined with seasoned experience in diligent market assessment.
Your goal is to well understand the absolute overall necessity and then ranked hierarchy of the key functional and emotional benefits required by your target market. Once developed, you can place any current and incumbent competitive offerings against those customer requirements and see where the key gaps and unmet needs exist. Ideally, your new solution will land right on top of one of the biggest gaps you are able to prove out.
Steps To Get To Better:
The below method is neither novel or new. It was used to develop each and every highly successful new consumer product that I was lucky enough to be associated with. Each of them was custom-built to fit through a wide-open door of unmet customer needs.
Identify and list all of your T1s most important needs and desired functional and emotional benefits — as a surrogate for the entire market you’re after.
Ask a representative, random sample of your T1s to score the relative importance for each of these desired benefits on a scale from 1-100, with 100 = “this is the most important need I have/benefit I want”
Ask the same or different T1s to similarly score your competitors’ performance, for each need/benefit on the list, with a 1-100 scale, but now, 100 = “how well does (this competitor) deliver upon this need or benefit?”
Compare the two scored lists: category benefit requirements vs. existing competition’s delivery performance. Identify where and how big the benefit delivery gaps are.
Now ask the same T1s to score your new solution concept — on the same scale as your competition. A clear, descriptive concept board or early prototype can be used as your initial stimulus. It will take many concept iterations to best define your own competitive offering.
Identify which unmet needs and benefits you can source competitive superiority from (if any).
Calculate the potential market value of your competitive advantage (if any).
Demonstrate how your existing or planned intellectual property will help sustain your competitive advantage.
Discovering, measuring and then validating your early Basis for Superiority —your precisely curated competitive point of entry —can be a more powerful strategic foundation for your promising new venture. It can help you stay on offense within early financing and provide a more compelling story to attract better talent to your mission.
Cross Milestone One, The Basis of Superiority Milestone, and just maybe, you will get more than an intriguing response from your favorite VCs.
Stay tuned for Milestone Two: The Forgotten Milestone.
[1] https://www.cbinsights.com/research/startup-failure-reasons-top/
[2]Geoffrey A. Moore, Crossing the Chasm (New York: First Collins Business Essential, 2006), pp. 18-49