From Idea to Scaling: Perspectives for successful founders
Recently a founder of a technology start-up reached out to me to review his VC pitch deck. During the course of our 60-minute conversation, I shared some perspectives on how he could improve his deck so he could be more successful in his pursuit of investment. If you are an entrepreneur seeking to raise funding or to scale your revenues, read on to learn a couple of key insights that will help. The example referenced comes from a technologist founder who had developed an interesting machine learning based solution for industrial application.
1. When fundraising, be clear about your foreseeable future market: For a technology business, I describe foreseeable future as the market that it would be targeting over the next 5 years. The founder, in our example, had represented the market to be a $10B predictive maintenance market for industrial applications in his pitch deck which is a remarkable and attractive opportunity at face value. But during the conversation it turned out that the company would only be ready for the predictive
maintenance market after 5 years from now. Until then, the software solution needed to collect data regarding the performance of engines in the field in order to have an established base for their machine learning algorithms. For the first 5 years, the market he was choosing, quality control for a manufacturing assembly line of new engines, was only $100M. This is orders of magnitude smaller than the claimed market size.
While a founder aiming to raise funding may feel that claiming a multi-billion-dollar market size number will attract significant investment interest, they are also running the risk of causing significant disappointment to a prospective investor during the initial stages of conversation and
relationship building if this turns out to mask the reality. It goes without saying that entrepreneur credibility is a huge part of any investment decision.
The reality is there are enough investors who would feel excited about backing a company that
has a chance of dominating a $100M market niche, as there are the unicorn-chasers who would only back companies operating in $10B+ markets.
Takeaway: Know your foreseeable future market and your specific competence in that market
that would allow you to win. Target investors who are excited about that vision, so that it creates a win-win for everyone. You can be authentic about your business, and investors will feel excited about what that win looks like.
2. Avoid distractions to perfecting your sales model: Once you have identified your foreseeable future market and your core competency that would allow you to win your share of business in that market, it is important to stay true to that winning goal and avoid distractions that would take you off-course.
In our example, this company had a unique approach to identifying performance issues in newly manufactured engines that can improve accuracy of QA checks by over 3x. It had recently completed a successful pilot with the QA department for a large automobile manufacturer, but the auto manufacturer was not willing to place a production order at the end of the pilot. This is a head scratcher, as 3x improvement in accuracy of QA checks would have significant value for the auto manufacturer. Value being derived from:
- reduced defects in the secondary checks run by the dealer which saves shipping and inventory costs associated with sending back defective engines to the factory and getting replacements,
- reduced failure rate of engines during warranty period which lowers servicing cost at dealers/service centers and
- improved brand reputation which is hugely important in the competitive automobile industry.
However, the QA department had other priorities and no budget to fund the purchase once the pilot was completed. This was the perfect opportunity for our example company to understand what challenges they might face in selling their product, and how they can develop their sales model to overcome these challenges.
Notice that the value drivers listed above were primarily for the Shipping, Dealer Management, and Brand management departments. The QA department was satisfied with its current accuracy rates and did not think it was compelling for it to improve in that area.
Unfortunately, our example company had established its relationship with the QA department only and was not successful in going to the other departments to articulate their value proposition. To maintain their engagement with the QA department in the hopes of building a stronger relationship and eventually getting an order, our example company then agreed to do a special project for engine VIN number tagging and identification which was completely unrelated to the core competency of engine QC improvement. This turned out to be a significant distraction and time loss. Time that should have been spent in identifying the stakeholders in the Shipping, Dealer Management and Brand departments was wasted on the QA department. This time would have been better spent in engaging in value articulation conversations with these other departments, understanding their objections and refining their response to those objections. Developing the conversation with the other departments and establishing the value of their solution to the enterprise was critical, not just for converting its first successful pilot into a sale, but also for the next 100 pilots that our example company would need to convert, on the journey to dominating their market niche.
Takeaway - A proven sales model is a key ingredient for the growth of any business. Once you have built a successful product, focus on activities that improve your sales competency and steer away from those take you away from it.
These two key learnings are significant in building the perception of credibility around your vision and executing to achieve that vision.
At SGP, we partner deeply with our portfolio companies in identifying core market niches, crafting strategies to target those niches, and developing & scaling repeatable sales models.