Evaluating Products & Markets

I received a lot of great feedback on a previous post about evaluating founders, and the same question came through several times (mainly from people who are starting companies): “what do you look at next?”  Looking at initial diligence, there are a few boxes that need to be checked with any intro meeting, and once I feel that I have a good understanding of the team, I want to dig in on the product and market.  Here is how I try to determine if the product and market represent a real opportunity:

What is the problem that your product is going to solve for?  One of the quickest paths to a “no” from a VC Associate is to fail to convey the existence and magnitude of a problem.  Last spring, I looked at three companies in the pet care space (though only one made it in the door for a pitch) – each one had a solid team of execution-oriented founders, some initial traction, and a unique business model that worked at a unit level.  I was never convinced by the magnitude of the problem.

Do people love their pets?  Yes.  Are they willing to spend money on them?  Yes.  Can you make a business out of caring for pets?  Yes.  Do people need a new way to monitor and care for their pets?  I don’t think so.  Is the process of caring for one’s pets so broken that the market is begging for a tech-enabled solution?  No.  Is this something that I can champion internally?  Definitely not.

That’s not to say that there isn’t an opportunity there.  As an example, people didn’t necessarily realize that we really wanted a new platform for intra-city private transportation – Uber, Lyft, and others have shown us that we did.  There are some ideas that will completely shift paradigms, and as the quote attributed to Henry Ford says, “If I had asked people what they wanted, they would have said faster horses.”  It is true that many of the best ideas will require foresight into problems that are harder to distill, which is why I try not to be dismissive of something like a dog walking app that, while not mind blowing on the surface, could be transformative.  Is it, however, up to the entrepreneur to convince me that this is the case.

What does your product do (e.g. what is your solution)?  Interestingly enough, I often have to jump in early on in a discussion to hit the pause button and ask “OK, can we step back and talk about what exactly it is you are doing” – likely a combination of too many pitch meetings and curse of knowledge.  It’s good to remember that this is the crux of your business, and it is not an area to breeze over.  Who are your customers?  What is your value proposition?  How do you plan to deliver it?  These are not difficult questions, so be sure to give them their due.

How big is the market?  This is one where I often get frustrated by figures that show either (1) a lack of understanding of how a market works, or (2) an intention to mislead.  Neither is good.  The U.S. healthcare market may be $3 trillion, but that is not the addressable market for your wearable.  Not every company has to be a unicorn (depending on who you are pitching to), and it’s important to understand that smaller, earlier stage funds may not be thinking that way at all when it comes portfolio construction.

An airtight understanding of a realistic addressable market and its trends, and a plan for how you will gain your share of that market are key to showing your own understanding of the business and the investment opportunity.  This can be bottom up or top down (ideally a bit of both) and should be a narrowly defined market based on your product offering and target customers.  Don’t throw up a number you can’t justify, as it’s an easy place to start poking holes.

Who else is doing it & why are you better?  Some people hate the generic competition slide, but I don’t.  Once I understand what you’re doing and what problem you are trying to address, I want to know (1) who is doing it now, (2) who else is trying to do it, (3) why hasn’t anyone done what you’re doing, and (4) how are you better?

Having a firm grasp of the competitive landscape is key, and a failure to demonstrate this will be an immediate red flag as to your own precision and thoughtfulness.  Don’t be afraid to bring up the competition because it is my job to turn over every rock in the space during diligence, and if there is something out there, I will find it.  I’d much rather hear it from you, and more importantly, hear why you’re going to beat them.

Deeper evaluation of the value proposition and defensibility will come.  Technical diligence, IP analysis, and references will all be part of a full diligence process, but what I need to see right away is how your idea could be special.

What is your time to market & how do you scale?  These questions can be treated separately, but it’s important for an investor to get a sense for (1) exactly where you are at in the product development/go to market process, and (2) the capital needed and runway you will have with this round of funding.  This helps to set milestones, make strategic decisions, and will ultimately play into other key elements of the diligence process such as the financial and competitive analyses.

What are the risks?  Most startups fail, and even though you may be confident in your idea and your ability to execute, it’s naive and dangerous to assume success.  While much of your pitch will require energy, passion, and confidence, this is a good place to show humility and rationality.  Are there macro risks?  Is there a dangerous incumbent that could wipe you out (hint: if you are eCommerce, this is Amazon)?  How defensible is your IP?  What assumptions have you made about the market and your customers?  What happens in a bear scenario of customer adoption and scalability?

If there were no risk, venture capital wouldn’t exist – and by pre-emptively surfacing these and addressing them, you will earn additional trust and credibility.

Keep in mind, this a preliminary framework to understand if a deal is worth digging in on; these questions will each ultimately generate pages and pages of analysis.  It does two things for me that I find valuable – (1) helps me be as efficient as possible by screening out deals that don’t satisfy high level criteria, and (2) gives me a framework from which I can dive deeply into diligence if it’s something I like.

Agree?  Disagree?  Am I missing something critical?  Let me know!


One thought on “Evaluating Products & Markets”

  1. As a pet owner, I think you are fundamentally undervaluing the importance of emerging technology in the pet care space. People may not KNOW they need it yet, but the freedom it provides pet owners could become a word-of-mouth catalyst to grow the pet ownership market, creating a virtuous circle for the value of pet care apps.

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