We’re often asked what we look for in a start-up. Traction with customers and users often matters, but it is not the only thing we look for. In this series of posts we look at the factors we think can make a great business, including aspects of traction, as well as the importance of your team and culture.
A company’s initial engagement with their users/customers (and substitutes, competitors) can be very instructive. As quantitative evidence of market demand, strong traction often makes investment decisions easier for VCs. So it’s rational for founders who are fundraising to want to show evidence of traction, in particular in spaces such as open source, marketplaces, and SaaS — where evidence of customer receptivity can be especially helpful and informative.
But there’s a balance, and at Mosaic Ventures we look for more than just traction.
In this post, we want to focus on two other elements that can show thoughtful entrepreneurs are building businesses with the potential to be large and valuable: technology / product and market.
Technology and product
The foundational tech choices that a startup makes are not always presented well to us. Given we are tech investors and that early tech decisions often constrain companies years into the future, we want to understand the basis for and implications of those decisions.
Starting at the bottom of the stack, is the back end architecture designed for scale and automation? A non-technical founder we liked, recently told us that they had chosen Azure because Microsoft gave the company a credit worth $500k. Since AWS offers a $100k credit — enough to launch this specific business and then raise substantial equity financing — and given that this decision would probably stand for ever, it wasn’t clear that the extra saving was a strong enough reason to make that vendor selection. A compelling answer might have been “for us, Azure beats AWS for specific tech & operational reasons” rather than just the incremental dollars. Given Azure’s increasing strategic relevance this was a doubly missed opportunity.
At the product level, we look for a clear roadmap. This starts with understanding the user carefully and in particular what the product “hooks” are that will drive early adoption. This is rarely a standalone decision. The product needs to fit with the stack and processes your users rely on daily — and come with the right APIs accordingly (That’s part of the genius ofSlack).
We get excited when founders present a plan that demonstrates how the product will provide increasing value over time, especially in markets that are noisy and competitive — as many SaaS markets are. For example, we are beginning to see interesting products in the monitoring space that predict faults algorithmically, and can demonstrate better results over time. Others capture the metadata of steps taken to improve performance and can prompt steps that customers should take for quicker resolution. A subset have built algorithms in ways that will learn from those steps and ultimately will automate remediation of common issues. Such a path to extend the scope of the product and offer better results for customers is exciting, and entrepreneurs that are building products with that perspective should certainly get in touch.
Startups that demonstrate that at their core is a platform technology extensible to multiple product areas are even more compelling. Such businesses maximize addressable market and value creation if successful. When (before Mosaic launched) I committed to invest in the security startupIllumio, the team was impressive; but I loved even more that the idea that Andrew and PJ had, for automating firewall policy management in hybrid cloud environments was a platform technology with other ramifications for infrastructure management, so if Illumio hit, it could hit big.
We would love to hear from entrepreneurs who are building companies with platforms or self-extending products planned in from the start.
As we mentioned in one of our first blogs, we look for startups that address a large potential market — typically a new or nascent space, or perhaps taking a unique angle on a large, busier market. Good entrepreneurs can articulate why a market is attractive; explain its landscape clearly, and in turn explain the path they have chosen to build their business. The best communicators will capture an investor’s imagination with what makes the market attractive.
One way of doing this is to convey the importance of your market. This is a function of size of opportunity, but goes beyond that. Are the customers in this market likely to feel that how they live or work has changed because this company exists? Does it liberate the creativity of the product’s users?
Other factors that we look for — often in combination — are:
- massive, globally addressable scale with significant growth;
- legacy competitors whose technology and cost structure make them vulnerable to disruption;
- practices that are culturally persistent but inefficient — sometimes due to regulation — and that technology can enable at unprecedented scale or by aggregating distributed small scale participation; and
- new technology and distribution that enables cheaper, faster customer acquisition and so enables building large customer bases rapidly (often growing the number of addressable customers).
Good examples of many of these characteristics include MySQL and Salesforce.com (both addressing large markets, competing with Oracle, and offering a lower price), GitHub (competing with command and control-based, centralized source code management tools from IBM amongst others), and Qlik. In the example of Github, the overlapping megatrends of distributed developer teams and open source provided very fast running water. All of these examples focused on bottom up adoption (or in the case of Qlik, when I met them in 2004, sales to peripheral business units) before over time selling into enterprises that already had pockets of users.
Each offered products that created end user value rapidly and so were able to reduce friction to adopt, drive usage, and take share of large and expanding markets. When we consider some of the early investments that we have made at Mosaic, Blockchain and Guidebook are textbook examples of this theme, with free and freemium-first products respectively.
In sum, when we meet entrepreneurs we want them to tell us how the markets they have chosen and the technology and products they have built are foundations for greatness. These will always be big topics for us. Address them and you will hold our attention.