As an early-stage investor, Floodgate’s Ann Miura-Ko looks for two breakthroughs in order to invest in a startup: The first happens in the value-seeking stage of a startup’s journey and the second occurs in its growth-seeking phase.
“There are really two stages to building a company,” Miura-Ko said at the TechCrunch Early Stage virtual event earlier this week. “One is what we call value-seeking mode, and this is where you’re really trying to figure out what the company actually looks like, including what’s the product? Who are you selling to? How do you price it? All of these things are still being discovered in the value-seeking mode.”
After founders have answered those questions, they can move into growth-seeking mode, she said. That’s the point when startups are trying to attract as many customers as possible.
Throughout these two distinct stages, Miura-Ko says she looks for the two breakthroughs: the inflection insight and product-market fit.
Inflection insights
The idea of an inflection insight, Miura-Ko said, is a relatively new framework Floodgate is exploring. Often times, she said founders need to ride some massive, exponential curves that allow their businesses to grow sustainably and scale.
These inflections have two parts to it: cause and impact. The causes are generally either technological (cloud, 5G), regulatory (GDPR, AV regulation) or societal (belief or behavior shifts). On the impact side, products and distribution may become cheaper or faster, while also presenting new use cases or customers, she said.
“Or even more interesting, you have something that was impossible that now is possible,” she said. “And that is an exponential impact that you could ride on.”
But simply finding that inflection insight doesn’t mean you should create a business. What founders must do next is determine if the insight is right and nonconsensus.
“So if you have an insight about an inflection and everyone agrees that this is true, then you have fundamentally no advantage and in fact, some of the incumbents might actually have a bigger advantage because they have more resources to put against it. Your insight, if it’s nonconsensus, means that it’s more of a secret, and it gives you more time to be able to pursue it. Obviously, if your insight is wrong, there’s not much we can do about it. But the fact that it’s nonconsensus, and it has the potential to be right, that’s the kind of insight I like to bet on.”
Beyond that, inflection insights must reveal something about the exponential impact and be durable, she said.
“If you’re just saying, ‘Hey, there’s this thing called 5G happening, and it’s really interesting,’ that doesn’t really give you insight into what kind of startup you ought to build,” she said. “You have to have an understanding of what that enables. And then the third law’s equally important: That insight has to be as durable as possible. So if it’s an insight that as soon as the next person understands it, it kind of disappears as an advantage. That’s a problem. And so, demonstrating why your insight has durability and is long-lasting and potentially, as a secret can be long-lasting, is really important.”
One example she cited is Figma, a collaborative design tool that had two inflection causes: one technological, and the other societal. On the tech side, Figma harnessed the power of WebGL to enable people to design within the browser.
“This was a really interesting insight because a lot of other players believed that having it in the cloud was enough,” she said. “And their ability to bring things into the browser actually made it a very unique experience.”
On the societal front, Figma noticed the increasing adoption of software for collaboration.
“Google Docs really revealed what collaboration could be,” Miura-Ko said. “They’re getting used to this idea that they could actually collaborate in the web on a browser in real-time. So that rising adoption created a shift in the mindset of what people believed was necessary.”
The inflection impact entailed the creation of a new experience within organizations that could bring design across disparate teams.
“They did it at a time when design actually was becoming much more central within an organization,” she said. “By targeting design, you could actually expand within the organization to marketing, into engineering, into product, into lots of other parts of the organization. So they sat on this inflection that was actually quite exponential in nature. […] It’s still to be seen how successful it will be, but there’s lots of evidence that Figma has a lot of staying power, and I think it’s a good example of riding on multiple types of inflection points.”
Product-market fit is a minimum viable company
Once founders have found that inflection point, achieving product-market fit, or, building a minimum viable company is the next step. The folks at Floodgate define MVC as the combination of good product value, strong business model and an understanding of how it fits into the overall ecosystem.
Product value
Contrary to popular belief, product value is not just a set of awesome features, Miura-Ko said. Instead, founders should think of it as a promise they’re making to customers about what they’ll deliver. It’s the value-proposition.
“It’s delivered and seen by having stickiness and incredible moments of delight, balanced out by the price that the customer has to pay, which is usually user effort to make this product useful to them. The reason why this is important is that the product has a job that the customer is hiring them to do. For a lot of companies, we see the founders are fixated on the features and what the product is versus what the job is that they are doing.”
Ecosystem
It’s not just the buyer or the user, Miura-Ko said. The ecosystem also includes the supply chain, distributors and regulatory agencies.
“One of the things we saw when some of our companies didn’t do as well was that there were other parts of the ecosystem that we had largely ignored — could be a supply chain, it could be a distributor, it could be a regulatory agency,” she said. “But in reality, it could even be a naysayer within the customer company. Could be the IT department, as an example, within the customer. Understanding the value proposition and also the negative value proposition for the whole ecosystem allows you to have a lot of clarity as to what your go-to-market strategy ought to be and ought not to be.”
Business model
The business model entails pricing, margins, customer acquisition, customer support and customer education. Too often, Miura-Ko said, founders think about pricing at the very end, after they’ve already built their product.
“But pricing can oftentimes impact what your product looks like,” she said. “And your product can also influence pricing. Working on these together can be really, really powerful, especially as you design your go-to-market at the same time. So we like to have this as a thought piece at the very start of building a business rather than at the tail end. And when you bring this all together, the product-market fit happens when these are all interlinked in a really cohesive way.”
That’s the point where founders can go into growth mode, she said. That could mean raising capital to pour money into the company, hiring additional people and so forth.
“But we believe that investing in growth before you have a real handle on all three pillars is a huge mistake and can result in what we like to look at as fake growth,” she said. “We think fake growth can be really rampant within, especially the VC ecosystem, because you could just put more money into these companies. But as a founder, as an employee of a startup, the last thing you want to do is take dilution that you don’t need. So this is the framework by which you can make sure that you don’t take dollars that you don’t need to grow your company.”
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