How to Become Investable in 13 Steps
Time kills all deals. For startups, speed to market has never been more critical. When we're investing in a company at BCG Digital Ventures, we look at how well the company will scale. We're focused on idea to Series A. Our startups must go from paper to market within 12 months and to scale within 36, or we fail them.
We've developed 13 questions to help achieve the speed to market and scalability required in today's rapidly accelerating landscape.
What's the purpose of your company? Does it satisfy a strong market demand? Purpose-driven companies attract (and retain) the right talent, maintain customer loyalty and drive profits, outperforming the stock market by 206 percent over the last decade, according to Havas Group.
At TOMS, the purpose is purpose. By providing one pair of shoes to a child in need for every pair purchased, TOMS was able to tap into what motivates its customers -- social change.
What market friction are you solving? There are three types of frictions that can turn into an investment opportunity for us:
- Market friction: We look to uncover (not create) our market through a social, economic, tech or regulatory change.
- Expected friction (access): Once we uncover a market, we then need access to it by looking for inefficiencies and pain points through ethnographic research.
- Latent friction: Once we find a pain point, we then need to make money. We do this by designing experiences people didn't know they wanted until we showed them (i.e. the Steve Jobs theory).
The rise of dockless scooter sharing points to an expected friction well-solved. E-scooter sharing platforms like Bird and the DV-incubated Coup have solved this by allowing users to simply unlock the scooter with their phone and leave it at their destination for the next rider.
3. Why now?
Is your idea too early/late to be in-market right now? A beautifully designed product with an incredible user interface won't cut it if either the technology or the market wasn't ready for it.
Before Bitcoin, there was Flooz. Launched in the late ’90s, this digital currency managed to raise $35 million, but shut down shortly after the dot-com bust as the market widely denounced "internet money." Today, there are more than 1,900 cryptocurrencies in the market. It's not always what you build, but also when you build it.
4. Corporate alignment
What corporate assets can you leverage? At DV, nearly everything we invest in has a corporate partner. At the beginning of a venture, we look across our partner's value chain to find a way to leverage a piece of the existing business. In doing so, we create new market value and an unfair advantage. If someone wanted to replicate what we've built, they would need to re-create not only the startup, but the conditions of the corporate partner.
Unilever's acquisition of Dollar Shave Club is a great example. By joining Unilever, Dollar Shave Club instantly gained access to millions of customers, legacy relationships with retailers and other resources it would have never had as a startup alone. In turn, Unilever was able to add a fresh, sexy brand to its portfolio, keeping younger consumers buying for years to come.
5. What's the solution?
What is the preferred reality? Establish this first, and then determine the MVP (minimum viable product) needed to launch. Remember, a MVP is not a prototype -- it's a product customers can actually use. Without an MVP, you can't test; without testing, you can't find product/market fit.
Dropbox recently beat estimates, earning more than $316 million in first-quarter revenue after IPOing in March. But, the MVP that started it all was a three-minute video demoing how to use it. Knowing the product build would require them to overcome serious technical challenges, this was an ingenious way to test the waters before investing years of development.
Are you 10 times better than your competition? If the answer is no, don't do it. Odds are, someone has already tried to build your product before. If you can do it better, faster or in a way that delights consumers more than your competitor, you might be onto something.
Before co-founding Twitter, Evan Williams was involved with the podcasting platform Odeo, which managed to raise a Series A round before closing shop after the release of iTunes. Realizing Odeo lacked a strong competitive advantage, he went on to work on a side project that eventually would become Twitter.
What's your secret sauce? Is there anything proprietary that makes you defensible against competitors? This could be technology, methodology, data, IP, relationships, etc. If there's nothing protectable about your startup, then it's a race to the bottom.
Microsoft acquired LinkedIn for $26 billion because it had something no one else had built: a thriving content-publishing platform, a relationship management tool, recruitment technology and data -- lots and lots of data, with access to its 500 million users.
8. Addressable market
What is the addressable market? Is it big enough for investors to care? Drill down and get more realistic about the true size of your market.
Who has the need for your product and the means to buy it? How many of these customers currently exist? And finally, whom do you share the market with, and how much of their piece of the pie can you take? Even if you've found product/market fit, that market may not be large enough to matter.
Kodak's brand, once synonymous with photography, ultimately failed after digital came onto the scene because it underestimated the impact it would have on the market. As the addressable market narrowed, the available market followed. Once you've found your market, don't assume it will always be there.
9. Business model
How will you make money? Is it enough to keep your startup above water and growing? Take a step back -- do the math, and ask yourself if your business is sustainable. It's not hard to get seed funding these days, but it's increasingly difficult to get to Series A. Growth is everything, but you have to prove you can eventually turn a profit.
When Snapchat was founded in 2011, its creators didn't know how they were going to make money. But, by 2013, the app had 60 million users and a $3-billion dollar offer from Facebook -- without ever making a profit. The team finally came up with their first real business model in 2015; geofilters allowing businesses to brand themselves through advertising. Most founders will not get so lucky.
10. What is the go-to-market plan?
How will you take your startup to market? Many founders get stuck at this stage. A viable go-to-market strategy requires finding a scalable way to sell your product and create a sustainable revenue stream. If you can't create a sustainable revenue stream, you'll never be able to repay your investors (or yourself), let alone achieve competitive advantage in the market. There's no playbook here; it's different for every business, and figuring out your plan will put you ahead of the pack.
When Jeff Bezos founded Amazon, his vision was to build "the everything store." Launched in 2005, Prime has played a big role in helping him get there. Serving as a beachhead into many different markets, including music/video and now discounts in retail, Prime continues to expand its reach. As of April 2018, Prime had more than 100 million subscribers.
Who else is going to participate? What other players have to exist for you to be successful? A startup ecosystem is a network of interdependent organizations built upon the collective effort of entrepreneurs, investors, agencies, etc. -- all working toward the shared objective to foster the growth of new startups.
Airbnb had to develop and maintain a complex ecosystem of guests, owners, property managers, hotels, residents, housing boards, cleaning services, etc. An entire micro-industry of companies has now sprung up dedicated to serving the needs of Airbnb's users.
Talent is everything. It will determine your startup's outcome more so than any other decision in its lifecycle. You may have a great product, but if your founding team doesn't have the right balance of personalities and skill sets, you will fail fast. Hire people who are passionate about the same things, but also people who think differently than you.
Before there was The Muse, there was PYP Media. When a disagreement left half the founding team locked out of the site, the company failed. After receiving funding from Y Combinator, the exiled co-founders went on to start the successful careers source that is now The Muse. But not all founders get this lucky -- up to 90 percent of startups fail, and most of those are due to team issues.
13. Road map
From idea to scale, do you know where you want to go? You need to understand what you want the future to look like in the next 12, 16, 18 months -- 10 years down the road. And what the road map and capital required to get there will be. A good road map is a powerful tool, but it can, will and absolutely must change.
It's no accident that Angry Birds is one of the most downloaded freemium games of all time. Its massive success was the product of a very deliberate road map to build not just a mobile game, but an entire world. It has continued to expand into new markets over the years, recently announcing its new content road map around the 2019 release of the Angry Birds two movie.
Building exponential startups
Operating in an exponential environment means we have to build exponential startups. If you take 30 one-meter linear steps, you've only walked 30 meters. But if you take 30 one-meter exponential steps, you could circumnavigate the earth. This mindset is reflected in the 13 questions we've developed, and it's what we look for in the startups we invest in. Use these questions to diagnose your startup, and build from there.