You Keep Using that Word...
This year marks the 35th anniversary of The Princess Bride, one of the funniest movies of all time. The most memorable line in the movie – which has spawned countless memes – comes from Inigo Montoya, who after hearing his boss Vizzini exclaim “inconceivable!” for the seventh or eighth time, declares:
I can’t help but hear Mandy Patinkin’s voice in my head when some founders pitch me their startups. Not because of mistakes in language or grammar, but because many founders misunderstand how certain words and phrases are interpreted by investors.
Here are 5 of the of the most common phrases that founders and investors interpret differently:
1. We Haven’t Spent Any Money on Marketing
See also: “All of our user acquisition is organic”
What Founders Think:
Our product is so great that users/customers are flocking to us. We haven’t had to spend any money on marketing…just imagine how awesome it will be when we do!
What Investors Hear:
We haven’t given a single thought to how we’re going to acquire users/customers outside of our personal networks.
If You Build It, They Will Come…
How To Do It better:
We haven’t done any paid marketing yet, because we were focused on building our MVP and had enough users in our [waiting list / referral list / etc.] to allow us to get meaningful user feedback. Once we finish fundraising, our #1 priority will be developing our go-to-market plan and user acquisition channels. In our early testing, the product has really resonated with [x, y and z personas]. We think we can acquire more users like that using [a, b and c strategies]. What do you think?
2. Our Pricing is Low Enough to Avoid Procurement
What B2B Founders Think:
Look how smart we are! We’re getting the most revenue possible while keeping sales cycles short. This is awesome!
What Investors Hear:
We’ve completely avoided going after bigger contracts that involve a procurement process / multiple decision makers / complex sales (in other words, we’ve been avoiding “real” enterprise sales).
This has two possible interpretations, neither of which is positive:
We still have to learn how to do enterprise sales, which is going to take time
We’re too scared to try “real” enterprise sales (which is going to cap our ACV)
How To Do It Better:
So far, we’ve intentionally priced our product below the procurement threshold so that we could gain a foothold with our target customers and prove out our MVP. We believe that there’s the potential for $x/year in revenue from some of these customers, which will obviously push us into longer and more complex sales cycles.
Coming out of this raise, our goal is to expand within those early customers while also targeting larger initial ACVs, both of which will require us to develop our “enterprise sales” muscle. What are some of the ways you’ve seen first-time founders accelerate their learnings around how to sell larger contracts into enterprises?
3. We Haven’t Started Monetizing Yet
What Founders Think:
A lot of founders seem to think that this is a “Get Out of Jail Free” card that lets them avoid any questions about revenue. If anything, it does the opposite. Unlike 5-10 years ago, today’s investors expect founders to start testing monetization strategies far earlier in their journey, particularly for B2B startups.
What Investors Hear:
We’re avoiding putting ourselves out there and finding out if we’ve actually built something people want to pay for. (This is akin to hanging out for weeks with someone you want to date, without ever getting the courage to ask if they want to go out with you.).
Some companies have valid reasons to not monetize by the time of their fundraise (e.g. products that are sufficiently complicated that a user wouldn’t reasonably be expected to pay at that point, consumer apps where monetization where network effects are key and scale is expected before monetization, etc.), but if you’re presenting a product that “solves” a customer need, complete with case studies, it’s hard to justify not charging at least some of them.
How To Do It Better:
Unless you’re just getting started, you should aim to start experimenting with monetization at least 3-6 months before your next fundraise. Even if the price is low, being able to demonstrate that someone (anyone) is willing to pay for your product is significant market validation for investors. You’ll also learn a lot about the difference between free users/companies and customers — data that can be included in your fundraising materials. For SaaS products, this can be as simple as switching from free to a 14-day trial. For enterprise customers, it means trying to go from free to paid pilots.
It’s scary, but at some point you have to put yourself and your product out there (and investors want to know that you’re willing to).
4. We Have No Competition
What Founders Think:
We’re the first ones doing this. Our product is so new/special/awesome that there’s literally no one in the world doing this!
What Investors Hear:
We don’t understand the market or our target customers. We’re not thinking seriously about the alternatives for what we do and are naively assuming that our product is magically going to win.
How To Do It Better:
In order to solve this problem today, users/businesses have to do [x, y and z], which has [a, b and c problems/drawbacks/costs]. We believe that we’re the first company to take our approach to solving this problem, but there are likely other startups looking at the same opportunity. Have you come across any others?
5. We’re Co-CEOs
This one isn’t very common, but when it hits it’s a doozy.
What Founders Think:
We work together so well as a team that we don’t need to assign labels to roles. We’re hitting all of our goals and this is awesome! We’ll figure it out later and it won’t be a big deal.
What Investors Hear:
We’re avoiding having the really hard founder conversations. (If as founders you can’t have the conversation about who’s the CEO, what else are you avoiding…?)
Note: In later-stage companies, co-CEOs isn’t entirely unusual. This works because roles and responsibilities can be clearly defined in mature organizations, which isn’t the case in startups. In early-stage startup, investors want to know who the “buck stops with.”
How To Do It Better:
Sorry to be the bearer of bad news, but on this one you have to put on your big kid pants, have those really, really hard conversations with your cofounder(s) and make a decision.
A handful of investors are okay with co-CEOs, but for the vast majority (particularly at the early stages), it’s a deal-breaker.
Take a deep breath and go for it…