When I started this blog one of my goals was to improve the transparency and feedback loop between entrepreneurs and investors. Today I want to share an experience I had last week and how I analyzed a startup- the business and the team.
A friend and serial entrepreneur introduced me to a startup that, without disclosing too many details, was helping businesses drive traffic during rainy days. A combination of Groupon for rainy days if you will.
- Assuming winter, on average, lasts six months – October/November to April/May – that means these guys have about another month to test the service before they park it aside for the next six months with almost no learning or feedback cycle. A startup is a race and one cannot afford to waste six months. Moreover, investing in them today and bearing six month every year of “dry season” means more capital is needed and the time to money just gets longer.
- Even if they solve a need for businesses, business owners are not likely to engage with them during summer. In a similar way, the likelihood of consumers demanding their service during the summer is slim. This leads to six month of inquiring fixed cost with almost no income.
- Economics – Average transactional value is about $15. Business owners are asked to offer a limited promotional price (similar to Groupon) to drive a sense of urgency for the consumers to book. Assuming they offer a 15%-20% discount and payment providers charge another 2.5%-3% that leaves almost no margin for the startup. Even if they can still squeeze a 6% lead generation value, it would be about $1. That then needs to cover both the acquisition cost of the user and the business and leave enough margin for other expenses.
- Two sided market place (business owners and consumers) with little ripple effect – What’s a ripple effect ? think of Dropbox – you want to share your files with a friend – you just recruited a new Dropbox member.
- Executive summary – While the executive summary was very impressive visually, it took me three times to read it and understand what the startup was doing. The need, which was clearly stated on the first page, was articulated again and again in the following pages. There was nothing about execution or about the economies. There was also nothing on the technology side so I assumed there are no technological assets developed.
- Though this was a mobile service, the executive summary contained no reference to the mobile app. I decided to look it up on the app store and give it a try. That also gave me a sense to the competitive landscape and the challenges related to promoting the service on the app store. It’s an early stage startup and I didn’t expect a full flown app but let’s just say what I saw supported my gut.
- Finally the team conveyed no relevant experience.
Just to make sure I’m not being too harsh with the entrepreneurs I replied to the CEO, shared my thoughts and offered a chance to share more over a call. I often do that to test how receptive the entrepreneur is to feedback. I was also hoping to hear more about their acquisition strategy, a key ingredient in their business, which was not addressed during the executive summary. He reply was, to me, a final validation. My guess is that he will either try a new idea in a few months or end up doing something else, other than a startup.
One might read this and argue that the analysis is based on the wrong criteria. It is easy to challenge every startup and argue why it would fail. It is difficult to argue why a startup would succeed and I often try to do that. It is all of those ingredients and others that form a preliminary gut feeling as to which startups are worth talking to. To the entrepreneurs I say: with so many reasons to fail, there are certain things you don’t want to fail at.