Depth of Market Insights
Last week, we had two pitch meetings back-to-back. The first team had years of experience at well-known companies and came from top colleges. The second team was young, barely out of an unknown college. Despite their strong profile, we couldn’t extract any unique insights about the market from the first team. The conversation stayed largely theoretical. With the second team, we got an in-depth understanding of the market, most of which we didn’t know before.
Now, most early stage investors index a lot on the founding team, because that’s the only known variable amongst all the uncertainty. One part of that is their track record. But an equally important part is how well they understand the market.
Three Levels
I’d categorise depth of market insights into three levels.
Level One: Assumption
I define level one as when founders operate at the level of assumptions. They almost have this idealistic perspective of what they want to build based on a high-level, top-down understanding of the market. Most importantly, they haven’t spoken to any potential customers or tried to understand the practical constraints of how things work.
We’ve seen two common patterns in all our conversations with such founders:
- They want to solve many different problems at once; there’s a lack of judgement about what’s important to solve and a lack of prioritisation about what to solve when.
- There’s dissonance in their strategy/model; for example – a B2B-type go-to market for a B2C product, or claiming they’re different from incumbents but have a very similar product.
Level Two: Hypothesis
This is when the founders have had detailed conversations with their potential customers. They have an understanding of the lives of their users, and what they want and don’t want. Usually, this happens after at least 50-100 such conversations. They also spend time in the market to understand the existing solutions, and test them to figure out where these fall short.
Now, the tricky part about talking to users is that people might say something, and do something else, and that happens fairly often. Hence, founders need to exercise great judgement in how to interpret what the market is telling them. They combine inputs from the market and their judgement to develop a working hypothesis of how to build a valuable solution.
Level Three: Insight
At level three, founders have launched in the market, and might have even gone through a few iterations. It could be a short pilot of a few weeks, or even years of full-scale operations. Practically, we’ve seen this happen in one of two ways – they’ve bootstrapped and launched, and are now looking to raise funds, or they’ve built the very business whose problem they’re looking to solve with their new venture (or faced the problems personally and couldn’t find a solution).
As you might expect, they have an in-depth understanding of what the market values, and what it doesn’t value, what are the practical constraints within which the solution must work, what users pay for and what they don’t care about. This is how they have insights, or know things that others simply cannot. This gives them immense clarity about what to build and how to scale it, which again requires judgement and differentiated thinking.
Experience v/s Insight
Ideally, more experience should lead to deeper insights about the market. However, we’ve seen enough cases where it doesn’t translate that directly:
- We’ve seen founders come out of some of the top startups, but they’re building something incremental or similar to what they’d built before (most recently, we’ve seen this happening with wealth-tech startups).
- Then, we’ve had founders who over-index on their prior experience v/s adapting to the market dynamics – sometimes, it works, and sometimes, it doesn’t.
The thing that I’ve learnt about insights is that there are two parts to it: first is knowing more than others, and second is the ability to action that in a differentiated manner. It’s hard to have the first, and even harder to have the second.
Investment Implications
Finally, I want to share how investors perceive founders at different levels and what I’ve seen of how investments happen:
- If you’re at level one, and dare I say that’s where a lot of founders are, it’s highly unlikely that any investor will seriously consider investing, so talk to your customers before pitching to investors
- In the last year, I’ve seen several extremely experienced operators also struggle to raise funds, or raise much smaller rounds, for their venture.
- Level two is most interesting because that’s where most pre-seed/seed deals happen:
- Serial entrepreneurs and experienced operators have the competence to build a logically and practically sound hypothesis, and then most investors compete to win these deals so they’re happy to write checks at this stage.
- However, investors largely pick founders whose hypothesis aligns with theirs, which also means they will decline others and that’s not necessarily a bad thing; although at times, there could be lots of wait and watch, and FOMO investing.
- The best founders raise funds well before they get to level 3 but for those outside the tech/startup ecosystem, they might still find it difficult to raise funds despite their deep market insights although that’s starting to change now.
If I were to compress the three levels into a simple heuristic: Level 1 is when you are sure you know everything but you don’t really know anything. Level 2 is when you know a few things, and you’re trying to figure out what’s right and what’s wrong. Level 3 is when you know enough things to determine what you think is right, but still know that it’s one of many rights, or could be wrong.