Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Gerry Langeler
“It’s a cluster @#$%!” How’s that for a direct quote (modified for family viewing) from a recent due diligence call I made? And yes, when the words hit my ears I broke out laughing so loudly that Linda in the next office stuck her head in my door to see what had happened.
This is one of the joys of doing due diligence on a new deal. It’s very much in the Forest Gump “box of chocolates” model – you never know what you’re going to get. But sometimes, just sometimes, you get far more than you expect in just a few words. In this case, I was probing around with an executive on our Technology Advisory Group who was getting his first exposure to the company in question. It turns out his firm had created an in-house tool to handle some of the functionality the startup was offering. And while they were getting by with their proprietary solution, his shall we say “candid” assessment of how he felt about the internal program (that his team had to create, support, and enhance) told me all I needed to know about whether this was indeed a pain point – and a major account opportunity for the startup, whether we invested or not.
Granted, he and I knew each other before the call, so his propensity for direct talk was higher than it might be with a stranger. But that’s why we keep a broad stable of very connected, very savvy industry professionals on that Advisory Group. That direct talk has both saved and made us millions over the years.
Of course, one data point does not make a curve (unless you are the CEO), so I made some other calls and discovered this issue was indeed a universal one. So, this really cool company with the really slick product isn’t going to get our money – at least not now. Maybe down the road this “uncomfortable” part of the functionality will become comfortable to people. But, if there is one thing we’ve learned the hard way: do not ever expect to drive, much less time, change in human behavior as a venture investor.
Again, here it’s good to remember some basics. With very few exceptions, most startups plan their success around market share percentage numbers in the high single or low double digits. So, it’s absolutely OK to find prospective customers who either don’t see the need, or have had that need met elsewhere. The overarching question is, “Why do they feel that way?” This gets to the core of good market segmentation and good sales account targeting. If you can figure out, in advance, who is likely to buy, and who isn’t, on some dimension that falls into customer business dynamics rather than the simplistic segmentations that keep consulting firms in business, you are onto something. Ideally, it’s far better for the startup to have figured this out before we do. But in any event, it is crucial we jointly figure it out before throwing money at marketing and sales campaigns. So, even before we invest, we poke around with customers trying to ascertain what separates a hot one from a cold one. In this case, my call right after the recalcitrant CEO was to his former VP of Marketing & Sales (now with a different company). He lit up like the proverbial Christmas tree. Since then, the startup has had a demo with him, and is planning a price/value conversation this week. Now, I also have a picture of why he’s hot, and the other is not.
The absence of that we call “bumping into trees.” And we again know from painful experience that bumping into trees burns cash at rates that bring tears to our eyes.
Here’s an off-the-wall suggestion. The next time you approach a venture capitalist, have teed up not only a list of prospects or customers you think will say wonderful things about you and your products, but a couple you know are not likely to buy as well. If you can use that approach to demonstrate to us how well you understand your market, and show that the segment that is accessible is still very large and attractive, you’ll be miles ahead of your competitors vying for our cash.
