As an active investor in agricultural technology, I hear pitches from startups that have found ways to make crops bigger, stronger and more resistant to pests, usually through some proprietary formula or advanced biotechnology.
I always challenge these folks with a little drill. I tell them there is an item on the table that can do the exact same thing, and I point to my glass of water. I explain that more water can make plants bigger, stronger and more resistant to pests; more fertilizer can, too. But farmers don’t use excessive water and fertilizer because of well-known diminishing returns.
This is the point where we begin to have a constructive talk about value, and whether the whiz-bang product being pitched truly has the potential to add it.
To customers, value is the difference between what they perceive and what they pay. For a farmer, this new super-product needs to return more profit than it costs, but it has to do sufficiently better than well-known and completely de-risked options such as additional water and fertilizer. Doing something because it’s new or supposedly easier simply doesn’t cut it—you have to keep growing value to be sustainable.
There are many ways to do this. Henry Ford didn’t invent the automobile, the assembly line or the conveyor belt. He did combine them, however, and drove down the time it took to build a car to 93 minutes. In doing so, he created a cost curve and customer value spread that revolutionized an industry.
Conversely, the price of an iPhone has never gone down, yet sales have climbed with each new model. Apple creates a value spread not by reducing costs, but by adding features that make buyers feel they are getting more with each version.
Too often I see startups focus on their cost curves so much that they neglect the most important goal: determining why someone would want to buy what they’re selling. A business needs to show that there is a compelling reason to buy its products and to keep buying them for a long time. Once companies figure that out, the cost curve takes care of itself.
If you find yourself pitching your company to a VC like me, don’t be surprised if I spend more time discussing your customer than I do learning about you. Successful, sustainable companies are the ones whose leaders know more about their customers’ economic expectations than their own. That’s the value proposition I look for—and you need to prove you can deliver it.