Customer Discovery to Understand the Problem

Early on, it’s critical to understand the customer’s problem. Too often, entrepreneurs come up with an idea that’s good to them, but falls flat with the potential customer. Use customer discovery to understand the problem without trying to sell them on the existing idea.

Here are a few things to keep in mind with customer discovery interviews:

  • Don’t lead the witness —it’s all too common to try and guide the potential customer down a path that’s consistent with the existing idea
  • Ask broad, open ended questions (remember the old adage: humans have two ears and one mouth for a reason — listen twice as much as you talk)
  • Work to understand how things work currently with as much minute detail as you can uncover
  • Find out what the ideal solution would be if time and money were no issue (if you could wave a magic wand and have anything you wanted , what would it be?)
  • Never show any prototypes you might have until after you’ve asked all your main questions (don’t introduce bias!)

Entrepreneurs would do well to use customer discovery to deeply understand the customer’s problem, and work to ignore their existing ideas.

What else? What are some more thoughts on customer discovery to understand the problem?

An Emotional Response to the Product

As part of the search for product/market fit, there’s an element that sounds fuzzy but is very real: an emotional response to the product. The basic growth equation is as follows:

Top of Funnel (traffic, conversion rates) x Magic Moment (create emotional response) x Core Product Value = Sustainable Growth

Just because a product solves a problem doesn’t mean that the solution, or experience, generates an emotional response. Most products are nice-to-have and not must-haves. Must-have products are much more likely to generate an emotional response.

People make the buying decision and people are emotional. Tap into a positive emotional response with the product as part of product/market fit. The best products all have an emotional response.

What else? What are some thoughts on the idea that an emotional response to the product is important?

Common Investor Questions at The Atlanta Tech Village

Several times a month I meet with investors from out of town that are interested in the Atlanta market and startups at the Atlanta Tech Village. With so much capital that needs to be put to work, investors are eager to find startups that have the beginning of a big business and the potential for strong unit economics.

Here are some of the common questions investors ask:

  • What startups should we be paying attention to in the building?
  • Any entrepreneurs we should meet with the next time we’re in town?
  • Do you have any startups doing X, Y, or Z (e.g. specific areas of interest like machine learning, health IT, marketing SaaS, etc.)?
  • Any startups growing fast with X to Y range of revenue (e.g. $1 – $2 million in recurring revenue)?
  • What events or programs should we consider for future visits (e.g. Atlanta Startup Village)?
  • Anything we can help with?

As expected, the questions from investors are fairly consistent as they’re looking for startups that meet their criteria and the opportunity to invest. Surprisingly, investors don’t have enough strong startups to invest in.

What else? What are some more questions investors should be asking?

Quarterly Simplified One Page Strategic Plan

Once a startup has product/market fit, one of the best things they can do is a Simplified One Page Strategic Plan and update it on a quarterly basis. The concept is easy: put the most important high-level things about the business on one side of one sheet of paper and ensure everyone in the organization understands all aspects of it. Nothing more, nothing less — make it a simple doc.

Here are the contents of the Simplified One Page Strategic Plan (Google Doc template and example plan):

Purpose

  • One line purpose

Core Values

  • General – fit on one line
  • People – fit on one line

Market

  • One line description of your market

Brand Promise

  • One line brand promise

Elevator Pitch

  • No more than three sentences for the elevator pitch

3 Year Target

  • One line with the goal

Annual Goals

  • 3-5 annual goals in table format with the start value, current value, and target value

Quarterly Goals

  • 3-5 quarterly goals in table format with the start value, current value, and target value

Quarterly Priority Projects

  • Three one-line priority projects with the percent complete for each

 

Entrepreneurs would do well to implement the Simplified One Page Strategic Plan (Google Doc template, example plan) and update it on a quarterly basis.

What else? What are some more thoughts on the Quarterly Simplified One Page Strategic Plan?

The Option Pool Shuffle

Whenever a startup raises money, one aspect of the conversation is around employee stock option plans and equity. Investors want to know that the company has equity set aside for employees while founders often want to delay their ownership dilution until they know they’re going to hire new employees and need to allocate new equity grants.

When raising money, investors will often require an increase in the size of the stock option pool to ensure there’s equity for new hires that are part of the funding plan. Only, some investors aren’t clear upfront whether the dilution for this additional option pool comes from the existing shareholders prior to financing or if it’ll come post financing and be shared across the new and old investors. The option pool shuffle is when new investors ask for an increase in option pool size, recommend a target size (e.g. add 15% of the company of the option pool), and then make the existing shareholders take the dilution for this increase (effectively reducing the pre-money valuation).

Entrepreneurs should think through their hiring plans and only increase the option pool based on their projected needs (e.g. add 10% of the company to the option pool instead of 15%). When lower than what the investor requests, the pre-money valuation effectively increases, and if the option pool is increased in the future, everyone shares in the dilution.

Increasing the option pool size and requiring it prior to funding is normal and shuffles the dilution to the existing shareholders. The key is to make the increase in size reasonable and to calculate that dilution when thinking about the effective pre-money valuation for the round.

What else? What are some more thoughts on the option pool shuffle?

Encouraging Institutional Investors to Buy 10% of the Angel Investor Equity

In last month’s post Why Not More Startup Success Stories, reader Jeff offered an interesting idea where institutional investors would be encouraged to buy 10% of the equity from the angel investors, assuming they’d be interested in selling. For most startup communities, there are very few exits resulting in long/indefinite delays before angel investors receive a return on their money and thus the rate at which returns are recycled back into the community is limited. If institutional investors more routinely bought a small stake from the angel investors — say 10% — that’d generate angel returns faster and allow institutional investors to buy a larger piece of the startup.

Here’s how it might look:

  • Angel investor buy 10% of the startup for $150,000 resulting in a $1.5 million post-money valuation
  • Startup achieves strong traction and raises a $3 million Series A at a $7 million pre-money ($10 million post-money)
  • Institutional investor that’s buying ~30% of the company (less the pro-rata from any existing investors that want to invest more) is willing to increase their investment up to $3.14 million such that the existing investor that owns 10% before the financing round can sell up to 20% of their stake which represents up to 2% of the company (10% ownership of the $7 million pre-money represents $70,000 for one percent) for $140,000 thus nearly recouping their initial investment while still having 8% of the company remaining (pre Series A investment)
  • Post Series A investment, and after selling 20%, the angel investor now has 5.6% of the company (8% diluted by 30%, not counting a potential increase in option pool)

The institutional investor would want the angel’s equity reclassified as the same type of equity as the Series A otherwise there might be a discount.

By encouraging institutional investors to buy a small piece of the existing equity held by the angel investors, angels are more likely to invest in other startups and capital will be recycled faster in the community. Entrepreneurs should consider asking institutional investors about this when raising capital.

What else? What are some more thoughts on the idea of encouraging institutional investors to buy a small amount of equity from existing angel investors?