This week I had the opportunity to speak with several early-stage, technology companies throughout the country. No matter where a company is based, I am usually most focused on learning the following things in the first meeting:
- What problem is being solved
- Is there enough evidence to justify the problem is big enough (can it scale)
- Can I clearly understand who benefits most from using the solution
- Who are their customers and what channel(s) are they using to reach them
- And lastly, How do they generate income
If I really like the company, I’ll ask follow up questions about customer acquisition cost (CAC), customer lifetime value (CLTV), churn, average revenue per customer, and their monthly recurring revenue model (if they have one, which I prefer they do). Other aspects about their business usually come out in the conversation such as details about their sales cycle or whether or not they’re operating a business-to-consumer (B2C) or business-to-business (B2B) model.
When I’m talking with early-stage companies who have minimal market traction I certainly don’t expect that they have much (if any) of the previously mentioned metrics. However, what I do expect is for them to have a general idea of what these metrics mean and whether or not they’ve considered these metrics into their business and financial models. For more mature companies, not knowing (or not being able to produce) this information is somewhat troubling. Mature companies either don’t know this data because they’re growing so fast and they haven’t a chance yet to spend time on it, they don’t have the necessary staff to produce the data, or they’re simply not tracking it. There’s an old saying that rapid company growth tends to mask and overshadow a company’s operational issues. However, in my mind, this is still not a sufficient excuse.
To my disappointment, none of the companies I spoke to this week had taken the time to think through these metrics. For the record, I would like to dismiss the notion that entrepreneurs in certain parts of the country are smarter or more advanced than entrepreneurs in other parts of the country. I think that what matters most is not where an entrepreneur is based, but how resourceful that person is and how far they are willing to go to solve problems to make their business successful. I appreciate it when entrepreneurs tell me they either flat out don’t know something or they don’t yet have enough information to come to a conclusion. Both positions are respectable. Entrepreneurs either “don’t know what they don’t know” (which is generally “okay” sometimes), or they “know what they don’t know” and are in the process of finding out what they and their potential investors need to know.
When I was in college studying to be an engineer, one of the best skills I learned was the process of solving problems. As we were presented with different problem exercises we were usually given one or two pieces of information to start with. The first step was to write down what we wanted to know. Next, we wrote down everything we definitively knew, and everything we could reasonably imply or infer as true. Lastly, we would write down what we didn’t know and then try to determine which tools we could use or combine to help us find what we needed. This is an iterative process that I believe can be readily be applied to building great companies (especially step three in the process). Great entrepreneurs are really good at gathering information, assembling the right people, utilizing the right resources, and combining them in a way to help their companies succeed.
As I said before, I don’t think it’s a deal-killer if an entrepreneur doesn’t have all the right answers or doesn’t know something right away. What I think most investors want is to invest in entrepreneurs who know how to solve problems and can demonstrate the ability get things done. And of course, produce a profitable outcome for everyone involved (obviously).