When I read Fred Wilson’s recent blog post, “Product Idea: Reverse Engineering VC Investment Strategies”, about a business idea he thinks someone should start, my eyes lit up…
I had actually tried to start this business.
I had about 15 paying customers at a $100 price point. But then I tried a larger scale sales campaign and came up short on my desired conversion rate. So I ultimately decided to discontinue it. But I learned a lot along the way…
Here are the exact steps I used to test the business idea, acquire customers, make some money, and then ultimately invalidate the idea and move onto a different idea:
The Customer Development
I had the idea to track and analyze startup investors because I experienced the pain of finding and research investors, and I thought others might too. But I wanted to make sure I wasn’t the only one who would find it useful…
I started by conducting about 15 customer development interviews with entrepreneurs to see if there are any pain points associated with fundraising/researching investors, and if so what they are.
I sent a short email to entrepreneurs I knew who were fundraising. It was fun doing customer development on entrepreneurs because they knew exactly what I was doing and what I was looking for.
While I had a product idea in mind, I did my best to forget about it and simply focus on learning what customers’ problems are. Here are the problems I discovered:
I learned that entrepreneurs typically spend about 20-30 hours researching, identifying, and qualifying investors to figure out who they should be talking to. Some were paying an employee to do it, which would mean they were spending at least about $500 depending on the employee’s salary.
They expressed concern over spending so much time and/or money on something not directly related to building product and getting customers.
In addition, despite all this research, many entrepreneurs still didn’t know about many relevant investors. This was concerning to entrepreneurs because they had the desire to cast a wide, but relevant net, knowing that most conversations wouldn’t go anywhere.
So the idea of having more relevant leads, with less time spent, was very appealing.
The feedback from the customer development interviews gave me enough conviction to proceed.
The Minimum Viable Product
After optimizing the offering based on what I learned in the interviews, I followed up with the interviewees who expressed deep pain associated with this research.
A few of the entrepreneurs I initially interviewed purchased.
I was thrilled. To me, there’s nothing quite like the feeling of the first paying customer — the feeling of figuring out how to solve a problem and delivering enough value that someone is willing to part with their hard earned money.
I started my offering as a service (a “concierge minimum viable product“). I would customize the reports based on the entrepreneur’s company/funding needs (stage, geography, industry, etc).
I was able to provide it as a service because my customers just wanted the end value and didn’t really care about how they got it.
I sourced the investor data from Crunchbase, Angellist, and a few other quality sources I found on the web.
The other sources I found on the web actually provided some validation that this was needed. They seemed to be popular blog posts and resources, indicating that there was demand for this kind of information.
In the reports I made, I included the names of every employee at the given VC firm along with links to their LinkedIn and Angellist profiles so the entrepreneur could quickly see how they might be able to get introduced.
I productized a couple of those reports, and acquired a few more customers by answering a couple questions on Quora and putting up a couple YouTube videos with links back to the site.
My roadmap was to have a searchable database, where entrepreneurs could enter their criteria and return back a list of qualified potential investors.
The Success Criteria
Given sales and qualitative feedback was going pretty well, I decided to do a larger scale sales campaign. I scraped Angellist for entrepreneurs raising a seed round, used a couple tools to find their email addresses, and then sent out about 150 cold emails.
Prior to the sales campaign I committed to discontinuing the business if I did not reach my “success criteria” of 10 sales. I set this criteria because it’s easy to keep chasing.
Unfortunately the sales campaign only led to about 3 or 4 sales, which was below my success criteria.
But why didn’t customers want it? Especially after me early validation?
The Customer Insights
The cold emailing did lead to several more phone conversations (customer development interviews) though. There I learned what their resignations were:
a. Entrepreneurs were not necessarily concerned with reaching more investors — they believed that if they didn’t have a strong 2nd connection they probably weren’t going to invest. So they believed their time was better spent mining/researching/networking through their existing contacts.
Fred Wilson rebutted this in reply to my comment on his blog post:
“Entrepreneurs are wrong about not needing to cast a wider net. what they should be doing is scouring the entire investor landscape, finding the 20-30 firms that are the best fit, then figuring out how to get a warm intro to them.”
But even if they are wrong, if they don’t know it, they’re still not going to buy from me.
b. While many entrepreneurs were doing this research, they had already competed it by the time I was reaching them. So there would be a challenge in finding customers at exactly the right time in the fundraising process.
c. Many entrepreneurs who are fundraising inherently don’t have much of a budget.
Anand from CB Insights echoes this in the comments section of Fred’s post:
“Startups are often cash poor and time rich and so spending 20, 40 or 80 hours doing something manually is easier to justify than spending $500 (or even $100).”
What I Could Have Done Differently
I had some pretty strong qualitative feedback from my customer development interviews and even made some money….could this still be a business?
I probably could have done a better job prospecting prior to the sales campaign, so that I would reach more relevant entrepreneurs, or sent more follow up emails.
I also could have tried more content marketing given that Quora and YouTube led to some sales.
Ultimately I decided the economics of the business were not strong enough, given the resignations describe above factors and given the time it was taking, so I decided to stick with my publishing business instead.
If I found the right marketing channels, perhaps it could be a nice passive income business. I’ve also thought about offering it for free, as a form of content marketing, as a way to get traffic and email subscribers. I could then monetize by selling my information products.
In the comments, Shana suggested it might be for VCs:
“I actually think this would be more useful to vcs. Fred is doing this, not entrepreneurs. That explains a lot about what’s going on within your interviews.”
She makes a good point about how it was Fred that was doing this research described in his blog post. But what problem would this be solving for VCs? Peaking their interest/curiosity? Helping them fundraise for their portfolio companies? Maybe it’s worth testing.
It’s clear that this data is of value to people. The challenge is in finding a good business model, and/or a low cost customer acquisition channel. However, everything takes more time and money than you think it will. So through this experienced I learned to make sure I’m dedicated and passionate about something before starting.