Tag Archives: pre-seed

Ten Questions Founder CEOs Should Always Be Able to Answer About Their Startups

I’m working with more early-stage companies these days (e.g., pre-seed, seed, seed-plus [1]) and one of the things I’ve noticed is that many founders cannot clearly, succinctly, and confidently answer some basic questions about their businesses.  I decided to write this post to help entrepreneurs ensure they have their bases are covered when speaking to angel investors, seed firms, or venture capitalists.

Note that Silicon Valley is the land of strong convictions, weakly held so it’s better in most cases to be clear, confident, and wrong than it is to waffle, equivocate, and be right.  I often have to remind people of this — particularly founders recently out of PhD programs — because Sand Hill Road is about the dead opposite of graduate school when it comes to this philosophy [2].

Here are ten questions that early-stage founder/CEOs should be able to answer clearly, succinctly, and confidently — along with a few tips on how to best answer them.

1. Who is the target customer?  Be precise, ideally right down to a specific job title in an organization.  It’s great if the answer will broaden over time as the company grows and its strategy naturally expands, but up-front I’d name the people you are targeting today.  Wrong:  “The Office of the CIO in IT organizations in F5000 enterprises around the world.”  Right:  “VPs of financial planning and analysis in 250-1000 employee Services firms in North America.” 

I’m admittedly fanatical about this, but I want to know what it says on the target buyer’s business card [3] .  I can’t tell you the number of times that I’ve heard “we sell to the CIO,” only to be introduced to someone whose business card said “director of data warehousing.”  If you don’t know who you’re selling to, you’re going to have trouble targeting them.

2. What problem do you solve for them?  When you meet one of these people, what do you tell them?  Right:  “We sell a solution that prevents spear phishing.”  Wrong:  “We sell a way to improve security culture at your organization” [4]. The latter answer is wrong because while an improvement in security culture may be a by-product of using your solution, it is not the primary benefit

First-order benefit:  our solution stops spear phishing.  Second-order benefit:  that means you avoid data breaches and/or save millions in ransomware and other breach-related costs.  Third-order benefit:  that means you protect your company’s reputation and your valuable brand.  Fourth-order benefit:  using our solution ends up increasing security culture and awareness.  People generally go shopping for the first-order benefit — they may buy into higher-order benefits, they may say they like your company’s approach and/or vision — but budgets and shopping lists get made on the first-order.  Don’t be selling security culture when customers are buying anti-spear-phishing.

3. How do they solve that problem today?  The majority of startups solve a problem that is already being solved in some way today.  Be realistic about this. Unless you are solving a brand-new problem (e.g., orchestrating containers at the dawn of the container revolution), then somehow the problem is either being solved today (e.g., in Excel, a legacy app, a homegrown system) or the buyer has deliberately decided not to solve it, likely because they think it’s unsolvable (e.g., baldness cures [5]).

If they are already solving the problem in some way, your new solution more likely represents an optimization than a breakthrough.  And even breakthrough companies, such as VMware [6], solved very practical problems early on (e.g., providing multiple environments on a laptop without having to physically change hard drives). 

As another example: even if you’re using advanced machine learning technology to automate trouble ticket resolution and — technically speaking, customers aren’t doing that today — they certainly are handling trouble tickets and the alternative to automatic resolution is generally a combination of human work and case deflection.

4. Why is your solution superior to the status quoOnce you can clearly describe how customers solve the problem today, then you should be able to clearly answer why your solution is superior to the status quo.  Note that I’m not asking how your technology works or why it’s superior — I’m asking why it provides a better solution for the customer. Sticking with the trouble ticket example:  “our solution is superior to human resolution because it’s faster (often by days if not hours), cuts ticket resolution cost by 90%, and results in greatly superior end-user satisfaction ratings.”  That’s a benefits-driven explanation of why it’s superior. 

5. Why is your technology different from that offered by other suppliers? Marketers call this differentiation and it’s not really just about why your technology is different from alternatives, it’s about why it’s better. The important part here is not to deep dive into how the technology works. That’s not the question; the question is why is your technology is better than the alternatives. The most common incorrect answer to this question is a long speech about how the technology works. (See this post for tips on how to build a feature, function, benefit marketing message.)

Example 1: traditional databases were built for and work well at storing structured data, but they have little or no capability for handling unstructured data. Unlike traditional databases, our technology is built using a hybrid of database and search engine technology and thus provides excellent capabilities for storing, indexing, and rapidly querying both structured and unstructured data.

Example 2: many planning systems require you to throw out the tool that most people use for planning today — Excel. Unlike those systems, our product integrates and leverages Excel as part of the solution; we use Excel formula language, Excel formatting conventions, and provide an Excel add-in interface that preserves and leverages your existing Excel knowledge. We don’t throw the baby out with the bathwater.

6. How many target customers have you spoken to — and what was their reaction to your presentation?  First, you means you, the founder/CEO.  It doesn’t mean your salesperson or co-founder.  The answer to the first part of the question is best measured in scores; investors want to know that you are in the market, talking with customers, and listening to their feedback.  They assume that you can sell the technology [7], the strategic question for later is the transferability of that skill.  They also want to know how target customers react to your presentation and how many of them convert into trials or purchases. 

7. Who’s using your product and why did they select it? It’s not hard to sell government labs and commercial advanced research divisions one of pretty much anything. It’s also not hard, in brand new categories, to sell your software to people who probably shouldn’t have purchased it — i.e., people not knowing all their options in the nascent market picked the wrong one. And that’s not to mention the other customers you can get for the wrong reason — because a board member had a friend on the executive staff, because someone was a big donor, etc. Customers “buy” (and I use air quotes become sometimes these early “customers” didn’t pay anything at all) the wrong software all the time, particularly in the early days of a market.

So the question isn’t who downloaded or tried your product, the question is who’s using it — and when they selected it did they know all their options and still choose you? Put differently, the question is “who’s not an accidental customer” and why did that set of non-accidental customers pick you over the alternative? So don’t give a list of company brand names who may or may not be active users. Instead tell a few deep stories of active customers (who they could ask to call), why they picked the software, and how it’s benefiting them.

8.  What is the TAM for solving this problem?   There are a lot of great posts about how to build a total available market (TAM) analysis, so I won’t explain how to do it here. I will say you should have a model that calculates an answer and be able to explain the hopefully simple assumptions behind that model. While I’m sure in b-school every VC undoubtedly said that “getting 1% of a $10B market is a bad strategy,” when they got into the workplace something changed. They all love big TAMs [8]. Telling a VC you’re aiming for 50% of an $800M TAM will not get you very far. Your TAM better be in the billions if not the tens of them.

9.  Why are you and your team the best people to invest in? Most interesting ideas attract several startups so, odds are, you have fairly direct competitors pretty much from inception. And, particularly if you’re talking with a VC at a larger firm, they have probably researched every company in the nascent space and met most of them [9]. So the question here is: (of all the teams I’ve met in this space) why you are the folks who are going to win?

I’d expect most startups in your space have smart people with strong educations, with great backgrounds at the right companies. That’s become the table stakes. The real question is thus why is your team of smart, well educated, and appropriately experienced people better than the others [10]:

  • A lot of this is confidence: “of course, we’re the right folks, because we’re the ones who are going to win.” Some people feel like they’re doing a homework assignment while others feel like they’re building a winning company. Be the latter. We know the stakes, we know the second prize is a set of steak knives, and we are going to win or die trying. #swagger
  • Drivers vs. passengers. Big successful enterprise software companies have definitionally employed a lot of people. So if you’re doing a sales-related category it’s not hard to companies full of ex-Siebel and ex-Salesforce people. The real question thus becomes: what did your people do at those prior companies? Were they drivers (who drove what) or were they passengers just along for the ride. If they drove, emphasize the amazing things they did, not just the brand names of where they worked.
  • Completeness. Some startups have relatively complete teams while others have only a CEO and CTO and a few functional directors. The best answer is a fairly complete team that’s worked together before. That takes a lot of hiring and on-boarding risk off the table. Think: give us money and we can start executing right away.
  • Prior exactly-relevant experience. Saying Mary was VP of ProductX Sales carrying a $500M number at BigCo is quite different from saying Mary just scaled sales at her last startup from $10M to $100M and is ready to do the exact same thing here. The smaller the gap between what people just did and what you’re asking them to do, the better.
  • Finally, and this is somewhat tongue in cheek, remember my concentric circles of fundraising from this post. How VCs see founders and entrepreneurs:

10.  If I give you money what are going to do with it? The quantitative part of this answer should already be in the three-year financial model you’ve built so don’t be afraid to reference that to remind people that your plan and financial model are aligned [11]. But then drill down and give the detail on where the money is planned to be spent. For extra credit, talk about milestone- or ARR-based spend triggers instead of dates. For example, say once we have 3 sales reps hitting their numbers we will go out and hire two more. The financial plan has that happening in July, but if July comes and we haven’t passed that milestone we won’t pull the trigger. Ditto for most hiring across the company. And ditto for marketing: e.g., we’ve got a big increase in programs budget in the second half of next year but we won’t release that money until we’re sure we’ve correctly identified the right marketing programs in which to invest.

It’s also very important that demonstrate knowledge of a key truth of VC-backed startups: each round is about teeing-up the next one. So the key goal of the Series A round should be to put the company in a position to successfully raise a Series B. And so on. Discuss the milestones you’re aiming to achieve that should support that tee-up process. And don’t forget the SaaStr napkin for getting a rough idea of what typical rounds look like by series.

Bonus: origin story. If I were to add one question it would be: tell me how you came to found your company? Or, using the more modern vernacular: tell me about your origin story? If yours is good and your founders are personable and videogenic, then I’d even make it into a short video, like the founders of Hashicorp did. You’re going to get asked this question a lot, so why not work on building the optimal answer and then videoing it.

# # #

Notes

[1] My, how things have changed.  The net result is that the new choke-point is series A (prediction 9).  Seed and angel money seems pretty easy to raise; A-rounds seem pretty hard — if you’ve already raised and spent $2M in seed capital then you should have something to show for it. 

[2] Most of the graduate student types I meet tend to be quite circumspect in their replies.  “Well, it could be this, but we don’t really know so it could be that.  Here are some arguments in favor of this and some against.”  In business, it’s better to be seen as decisive and take a clear stand.  As long as you are also perceived as open-minded and responsive to data, you can always change your mind later.  But you don’t want to be seen as fence-sitter, endlessly equivocating, and waiting for more data before making a decision.

[3] Or the more modern equivalent: an email footer or LinkedIn profile.

[4] Unless a company is shopping for training to improve security culture.  In which case, it’s a first-order benefit.

[5] Reminder that I have moral authority to talk about this :-). This type of problem is often called “latent pain” in sales, because it’s a pain the buyer is unaware they have because they don’t believe there is a solution. Ergo, they just get used to it. Thus, the first job of sales and marketing is to awaken the buyer to this latent pain.

[6] Yes, I know that virtual machines predate VMware considerably, particularly IBM’s VM/CMS operating system, so it wasn’t the creation of the virtual machine that I’d call a breakthrough, but using it to virtualize Microsoft and later Linux servers.

[7] If you can’t, it’s hard to assume that someone else will be able to.  Perhaps you’re not a natural-born seller, but if you were passionate enough about your idea to quit your job and found a company that should generally compensate.  Authenticity works.

[8] Most probably on the logic that they don’t want 1% of a $5B market, they want 40%. That is, they want both: big share and big TAM. And, if you mess up, there’s probably a safer landing net in the $5B market than the $500M one. Quoting the VC adage: great markets make great companies.

[9] This is the big difference between angels and funds. Angels typically meet one team with one idea, evaluate both and make a decision. Early-stage funds meet a company then research every company in the space and then pick a winner.

[10] I’m doing this in the abstract; it’s much easier in the concrete if you make a table and line up some key attributes of your team members vs. those of the competition. You use that table to come up with the arguments, but you don’t ever use that table externally with investors and others.

[11] I’m surprised how many folks dive into answer this question completely ignoring the fact that you’ve likely already put a three-year financial model in front of them that provides the high-level allocation of spend already. While it doesn’t seem to slow down some entrepreneurs, I think it far better to be a founder who refers to his plan a bit too much than a founder acts as if the financial plan doesn’t even exist.