Founders often ask me what’s the best way to cold email an investor. *in my best TV announcer voice* Do you want to know the one trick to get replies for your cold email startup pitches that investors don’t want you to know? Ok, I lied. No investor ever said they don’t want founders to know this, but how else am I going to get a clickbait-y question? Time and time again, I recommend them to start with the one (at most two) metrics they are slaying with. Even better if that’s in the subject line. Like “Consumer social startup with 50% MoM Growth”. Or “Bottom-up SaaS startup with 125% NDR”. Before you even intro what your startup does, start with the metric that’ll light up an investor’s eyes.
Why? It’s a sales game. The goal of a cold email is to get that first meeting. Investors get hundreds of emails a week. And if you imagine their inbox is the shelf at the airport bookstore, your goal is to be that book on display. Travelers only spend minutes in the store before they have to go to their departure gate. Similarly, investors scroll through their inbox looking for that book with the cover art that fascinates them. The more well-known the investor, the less time they will spend skimming. And if you ask any investor what’s the number one thing they look for in an investment, 9 out of 10 VCs will say traction, traction, traction. So if you have it, make it easy for them to find.
That said, in terms of traction, most likely around the A, what growth metrics would be the attention grabber in that subject line?
Strictly annual growth
A while back, my friend, Christen of TikTok fame, sent me this tweetstorm by Sam Parr, founder of one of my favorite newsletters out there, The Hustle. In it, he shares five lessons on how to be a great angel investor from Andrew Chen, one of the greatest thought leaders on growth. Two lessons in particular stand out:
2. Run towards the heat.
If a company has tons of hype and seems overvalued, don't run away. Run towards it. Hype is good. Means they'll raise, exit at higher valuation. And the price likely won't feel overpriced after the startup exits.
3. Look for stuff that's growing at least 3x a year.
A business can grow slowly and still be great. But if you want a huge exit as an angel, you need at 3x annual growth for users, revenue, or something else important in order to get a multi-billion outcome.
Why 3x? If you’re growing fast in the beginning, you’re more likely to continue growing later on. Making you very attractive to investors’ eyes – be it angels, VCs, growth and onwards. Neeraj Agrawal of Battery Ventures calls it the T2D3 rule. Admittedly, it’s not R2-D2’s cousin. Rather, once your get to $2M ARR (annual recurring revenue), if you triple your revenue each year 2 years in a row, then double every year the next 3 years, you’ll get to $100M ARR and an IPO. More specifically, you go from 2 to 6, then 18, 36, 72, and finally $144M ARR. More or less that puts you in the billion dollar valuation, aka unicorn status. And if you so choose, an IPO is in your toolkit.
Source: Neeraj Agrawal’s analysis on public SaaS companies that follow the T2D3 path
For context, tripling annually is about a 10% MoM (month-over-month) growth rate. And depending on your business, it doesn’t have to be revenue. It could be users if you’re a social app. Or GMV if you’re a marketplace for goods. As you hit scale, the SaaS Rule of 40 is a nice rule of thumb to go by. An approach often used by growth investors and private equity, where, ideally, your annual growth rate plus your profit margin is equal to or greater than 40%. And at the minimum, your growth rate is over 30%.
For viral growth, many consumer and marketplace startups have defaulted to influencer marketing, on top of Google/FB ads. And if that’s what you’re doing as well, Facebook’s Brand Collabs Manager might help you get started, which I found via my buddy Nate’s weekly marketing newsletter. Free, and helps you identify which influencers you should be working with.
But what if you haven’t gotten to $2M ARR? Or you’ve just gotten there, what other metrics should you prepare in your data room?
As part of my work, I talk to many seed-stage SaaS founders. At the seed, most of these founders are thinking about how to get to product-market fit. The one in zero to one. They’re launching their product with a select few companies to really nail their pain points. And often times, pricing and the business model take a backseat when they offer their customers the product for free or at an extreme discount. While investors don’t expect founders to nail pricing at the seed, it’s useful to start thinking about your revenue model early on. After all, pricing is both an art and a science. And with the right pricing structure, it can also be your proxy for assessing product-market fit. Here’s how.
Every product manager out there knows that customers don’t always know what they want, so asking them for a solution rarely nets valuable feedback. Rather, start with the problem. What are their frustrations? What sucks? What’s the last product they bought to attempt to alleviate their problem? Subsequently, what’d they like about that product? What didn’t they like?
There are two perspectives you can use to approach pricing: cost-plus and value-based. Cost-plus pricing is pricing based on selling the product at a given markup from its unit cost. The biggest mistake founders often make here is underestimating how much it costs to produce a product.
On the other hand, there’s value-based pricing. An approach where you determine the economic value of the service you are providing and give it to your customers for a bargain. Superhuman, for instance, prices the fastest email experience at $30/month. Or in a different light, a dollar a day. If you are saving more than a dollar of economic value a day by responding to emails faster than ever, then the product is worth it. The biggest pitfall here is that founders often don’t fully understand the value they’re bringing to their customers, which is a result of:
They don’t understand your value,
Or you can’t convince them of the value you think you offer.
To visualize both of these approaches better, let’s use the pricing thermometer, as YC calls it.
The greater the gap between two nodes (i.e. value and price, or price and cost), the greater the incentive. If you’re selling at a price far greater than its unit cost, you are far more motivated to sell your product. On the flip side, if your product is priced far below the value and benefits you provide, a customer is more motivated to purchase your product.
Buyers vs Customers
To take it a step further, if you’re planning to scale your startup, what you’re looking for our customers, not buyers. Buyers are people who purchase your product once, and never again. They learned from their mistake. Your product either didn’t deliver the value you promised or the value they thought you would deliver. Customers are repeat purchasers. Why? Because they love your product. It addresses your customers’ needs (and ideally more) again and again. Your customers’ satisfaction is evergreen, rather than ephemeral.
When you only have buyers, you have to push your product to others. It’s the epitome of a door-to-door salesperson. Think Yellow Pages.
When you have customers, you feel the pull. Customers are drawn to you. They come back willingly on their own two feet. As Calvin French-Owen, co-founder of Segment, once said: “The biggest difference between our ideas pre-PMF vs. when we found it was this feeling of pull. Before we had any sort of fit, it always felt like we had to push our ideas on other people. We had to nag people to use the product.”
Value-based pricing is playing to win. Cost-plus pricing is playing to not lose. While the latter is convenient strategy when you’re a local business not looking to scale (i.e. coffee shop, local diner, local auto parts store, etc.), it’s incredibly difficult to scale with, especially as customer needs evolve. As you scale, your customers might include anyone from Microsoft who wants you to bring a sales engineer to integrate your product to a 5-person startup team who’s just testing your product out. With cost-plus pricing, you’ll be forced to determine price points on a case-by-case scenario. With value-based pricing, you can systemize dynamic pricing based on evolving customer needs. As their value received goes up, the price does too.
As the name suggests, to generate pull, we have to start from value. In this case, your value metric.
Over the past decade, stretching its roots to the dot-com boom, there have been more dialogue and literature around entrepreneurship. In a sense, founding a business is easier than it’s ever been. But like all things in life, there’s a bit more nuance to it. So, what’s the state of startups right now?
Lower Barriers to Entry
A number of factors have promoted such a trend:
There are an increasing number of resources online and offline. Online courses and ed-tech platforms. Fellowships and acceleration/incubation programs. Investor office hours and founder talks. YouTube videos, online newsletters, and podcasts.
The low-code/no-code movement is also helping bridge that knowledge gap for the average person. Moreover, making it easier for non-experts to be experts.
The gig economy have created a fascinating space for solopreneurship to be more accessible to more geographies.
Demand (by consumers and investors) fuels supply of startups, through knowledge and resource sharing. Likewise, the supply of startups, especially in nascent markets, fuels demand in new verticals. So, the ecosystem becomes self-perpetuating on a positive feedback loop. As Jim Barksdale, former Netscape CEO, once said:
“There are only two ways I know of to make money – bundling and unbundling.”
Bundling
Unbundling
Market Maturity
Market Nascency
Horizontalization
Verticalization
Breadth
Depth
Execution Risk Bias
Market/Tech Risk Bias
Right now, we’re at a stage of startup market nascency, unbundling the knowledge gap between the great and the average founder. This might seem counter-intuitive. After all, there’s so much discourse on the subject. There’s a good chance that you know someone who is or have thought about starting a business. But, I don’t believe we’re even close to a global maximum in entrepreneurship. Why?
Valuations are still on the rise. Six years back, $250K was enough runway for our business to last until product-market fit. Now, a typical seed round ranges from $500K-$2M. A decade ago, $500M was enough to IPO with; now it only warrants a late-stage funding round. By capitalistic economic theory, when a market reaches saturation, aka perfect competition, profit margins regress to zero. Not only are there still profits to be made, but more people are jumping into the investing side of the business.
Yes, increasing valuations are also a function of FOMO (fear of missing out), discovery checks (<0.5% of VC fund size), super duper low interest rates (causing massive sums of capital to surge in chase yields), and non-traditional venture investors entering as players in the game (PE, hedge funds, other accredited investors, (equity) crowdfunding platforms). It would be one thing if they came and left as a result of a (near) zero sum game. But they’re here to stay. Here’s a mini case study. Even after the 2018 drop in Bitcoin, venture investors are still bullish on its potential. In fact, there are now more and more specialized funds to invest in cryptocurrency and blockchain technology. Last year, a16z, one of the largest and trendsetting VC players, switched from a VC to an RIA (registered investment advisor), to broaden its scope into crypto/blockchain.
Great founders are scarce
“The only uncrowded market is great. There’s always a fucking market for great.”
– Tim Ferriss, podcaster, author, but also notably, an investor and advisor for companies, like Facebook, Uber, Automattic and more
Even if founders now have the tools to do so, it doesn’t mean they’ll hit their ambitious milestones. For VCs, it only gets harder to discern the signal from the noise. Fundamentally, there’s a significant knowledge delta – a permutation of misinformation and resource misallocation – in the market between founders and investors, and between average founders and great founders.
The Culinary Analogy
Here’s an analogy. 30 years prior, food media was still nascent. Food Network had yet to be founded in 1993. The average cook resorted to grandma’s recipe (and maybe also Cory’s from across the street). There was quite a bit of variability into the quality of most home-cooked dishes. And most professional chefs were characteristically male. Fast forward to now, food media has become more prevalent in society. I can jump on to Food Network or YouTube any time to learn recipes and cooking tips. Recipes are easily searchable online. Pro chefs, like Gordon Ramsay, Thomas Keller, and Alice Waters, teach full courses on Masterclass, covering every range of the culinary arts.
Has it made the average cook more knowledgeable? Yes. I have friends who are talking about how long a meat should sous vide for before searing or the ratio of egg whites to egg yolks in pasta. Not gonna lie; I love it! I’ll probably end up posting a post soon on what I learned from culinary mentors, friends, and myself soon.
Is there still a disparity between the average cook and a world-class chef? Hell ya! Realistically I won’t ever amount to Wolfgang Puck or Grant Achatz, but I do know that I shouldn’t deep fry with extra virgin olive oil (EVOO) ’cause of its low smoke point.
Great businesses are scarcer
The same is true for entrepreneurship. There are definitely more startups out there, but there hasn’t been a significant shift in the number of great startups. And the increase in business tools has arguably increased the difficulty to find business/product defensibility. It’s leveled the playing field and, simultaneously, raised the bar. So yes, it’s easier to start a business; it’s much harder to retain and scale a business.
It’s no longer enough to have an open/closed beta with just an MVP. What startups need now is an MLP (minimum lovable product). Let’s take the consumer app market as an example.
The Consumer App Conundrum
Acquiring consumers has gotten comparatively easier. Paid growth, virality, and SEO tactics are scalable with capital. More and more of the population have been conditioned to notice and try new products and trends, partly as a function of the influencer economy. But retaining them is a different story.
So, consumers have become:
More expensive to acquire than ever before. Not only are customer acquisition costs (CAC) increasing, with smaller lifetime values (LTV), but your biggest competitors are often not directly in your sector. Netflix and YouTube has created a culture of binge-watching that previously never existed. And since every person has a finite 24 hours in a day, your startup growth is directly cutting into another business’s market share on a consumer’s time.
And, harder to retain. It’s great that there’s a wide range of consumer apps out there right now. The App Store and Play Store are more populated than they’ve ever been. But churn has also higher now than I’ve seen before. Although adoption curves have been climbing, reactivation and engagement curves often fall short of expectations, while inactive curves in most startups climb sooner than anticipated. Many early stage ventures I see have decent total account numbers (10-30K, depending on the stage), but a mere 10-15% DAU/MAU (assuming this is a core metric). In fact, many consumers don’t even use the app they downloaded on Day 2.
Luckily, this whole startup battlefield works in favor of consumers. More competition, better features, better prices. 🙂
So… what happens now?
It comes down to two main questions for early-stage founders:
Do you have a predictable/sensible plan to your next milestone? To scalability?
Are you optimizing for adoption, as well as retention and engagement?
With so many tools for acquisition hacks, growth is relatively easy to capture. Retention and engagement aren’t. And in engagement, outside of purely measuring for frequency (i.e. DAU/MAU), are you also measuring on time spent with each product interaction?
How are you going to capture network effects? What’s sticky?
Viral loops occur when there’s already a baseline of engagement. So how do you meaningfully optimize for engagement?
From a bottom-up approach (rather than top-down by taking percentages of the larger market), how are you going to convert your customers?
How do you measure product-market fit?
What meaningful metric are you measuring/optimizing?
Why is it important?
What do you know (that makes money) that everyone else is either overlooking or severely underestimating?
What are you optimizing for that others’ (especially your biggest competitors) cannot?
Every business optimizes for certain metrics. That have a set budget used to optimize for those metrics. And because of that, they are unable to prioritize optimizing others. So, can you measure it better in a way that’ll hold off competition until you reach network effects/virality?
Building a scalable business is definitely harder. And to become the 10 startups a year that really matter is even more so. By the numbers, less likely than lightning striking you. In my opinion, that just makes trying to find your secret sauce all the more exciting!
If you think you got it or are close to getting it, I’d love to chat!
