How to eliminate the #1 killer of startups
I recently I wrote about the Product Management Gap: the period of time between having a successful demonstration of a technical innovation (the proof-of-concept) and when a full-time team member is assigned to focus on managing the product(s) that feature it.
The Product Management Gap is a pervasive and deadly problem in the VC-backed startup space that I feel accounts for over half of the ventures that succumb to the dreaded Series A Crunch. Although it’s easy to identify, and affects nearly every startup, the Gap is also stubbornly difficult to fix without access to the talent, and budget growth-stage companies have at their disposal to hire qualified Product Managers
…and how to get VCs to give them to you. These common traits define every startup successfully raising venture capital in today’s traction-centric market.
What it Takes to Raise a First Round
VCs are ultimately judged by their own investors on their Internal Rate of Return (IRR). In order to optimize that metric they need to time their investments so they’re getting in at exactly the right point in history… or at least they need to feel that way. It’s up to startup founders to create the sense that this time is NOW.
An early-stage investor will back a company once they believe they will see a substantial return on their capital in a reasonably short time horizon. For a seed-stage fund that’s about 20x in a 5-7 year time-frame (or about 1x the entire fund’s size). In today’s market of rising seed valuations, GPs at funds are looking for real product traction and simply won’t be interested if they think a startup still has major go-to-market assumptions to figure out.
If you are successful at defining metrics that tell a narrative of traction, measure progress towards increasing them, and regularly update your most interested potential investors on that progress, then the barriers to raising capital will begin to crumble quickly.
The precondition for this is that founders need to have effective conversations with actual VCs in order to understand what investors perceive as the venture’s core assumptions. Here’s the trick for how to get started…
How rising VC expectations are causing founders to ignore user experiences in favor of unsustainable growth.
The trouble with innovation…
Through my experience as a repeat technical startup founder, I’ve found the greatest difficulty in developing a new technology is not getting something to function. It’s discovering that a user’s tolerance for learning a new workflow is frustratingly low. People are seeing something that’s different, but they are experiencing it through the lens of expectations they’ve been refining over their entire lives… expectations anchored by existing solutions that are measurably worse than the shiny new one.
There is some amount of friction inherent to the adoption of any innovation. A company must immediately convey the value of what they’ve spent months, or years, building. In the world of software, there’s a very brief window of time when a potential user can be convinced that a product meets their need. If a user is not aware of their need at this point in time, then the company faces the additional challenge of educating a consumer. Good Luck!
In no other context is this friction as essential to overcome quickly as in that of a startup. Startups are organizations with a lit fuse. Financial backers have given them a chance to test a new idea. They are operating at a loss, and will go out of business unless they raise additional capital in the near future… and that’s with a dedicated team working long hours at below-market salaries. Investors, employees, and even the founders assume this risk because they believe that their efforts will eventually be rewarded by a lucrative market segment in dire need of their offering.
Why so many startups fail so early.
Everybody knows most startups fail, but what’s surprising is that 70% of seed-funded companies do not survive long enough to raise a subsequent round. In the venture community, this trend is better known as the Series A Crunch, and I believe it’s a consequence of rushing to market without having established sufficient product desirability — or, in Venture Capitalist parlance, traction.
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