Why Must Every Great Business Start With a Problem? | Part 2

The critical thing that we look for at Deeque, it's really about people who are solving those really important problems. We're really excited about people who are very excited about a problem rather than those people who kind of think that they've got a solution that's going to change the world.

Hi, I'm Ollie.

And I'm Sam. And we're back with Founder Unlocked. Our mission at DQ Ventures is to help experienced professionals transition to entrepreneurship and start their own businesses. All businesses start somewhere. They start with a problem, or they should start with a problem. I think often we find people starting with the solution that they have in their heads and not actually a problem that a specific customer is facing. Why is it that we like to get people to focus on the problem to start?

Every VC will tell you, and it's much the same with us, everybody comes to pitch their idea. They want to pitch you their solution and how amazing it's going to be. And while that's all well and good, often there's a whole lot of thinking that has to go behind that solution first. And that's really why Deque exists. So when people come to us, what we're really looking for is to try and ascertain what is the problem that they feel is out there? How big is this problem and who has this problem? So for us, it's really, it's not so much about the idea. It's about the type of person, what's your background? What's your expertise? How well do you understand the market that you're sort of looking to, wanting to set up a business in? And then it's about really diving into that problem and understanding, you know, who does that problem apply to? What sort of company does it apply to? Often people incorporate, there might be 10,000, 30,000, 50,000 people working in a corporation. And that corporation's been around for 20 or 30 or 50 years, and it's solving a multitude of problems across a broad range of different industries. But exactly as you said at the beginning, when you start, you've got to solve this one problem for one person in an organization. And most importantly, you've got to get them to pay for it. And that's the beginnings of a business.

And one of the reasons why we like working with experienced professionals, those 40 to 50-year-old people who've been in corporate careers for a long period of time, is they have that deep expertise of their industry and quite often they've experienced the problem themselves.

So they have familiarity with the pain points around the problem and they understand what that customer profile Yeah, I think the interesting thing is that we aren't the ones who are going to really understand that problem or that industry initially. That's not our role in this. We are looking for people who have much more diverse experience than we do and really understand a particular industry. And where DeeQ comes in is to bring in that business smarts, that expertise around building a sustainable long-term business. What we are really looking for is kind of problems we may never have heard of. We don't even know they exist in whatever industry it might be that you happen to be an expert in. But what we know how to do is how to sort of analyze that problem, get an understanding of how a solution might fit and solve that particular problem for someone, and then how we can sort of generate revenue from that. How can we charge one company for it? How can we find 10 companies? Does it work in multiple geographies? Does it have the kind of— longevity that startups need. I mean, one of the examples, sort of classic startup, something like an Airbnb, which was a small sort of idea in San Francisco. The air of Airbnb actually stands for air mattress, because what they wanted to do was put air mattresses down in houses and rent out those air mattresses. And so they recognized that the problem was that there weren't enough beds when large events were going on. So how could they solve that problem? Initially, in a very small way, they do one thing. And then you look at Airbnb, which has operations in 160 countries around the world, is a multi-billion-dollar startup, but it starts off with just solving one problem in one very small space for one particular type of customer. And that's kind of the way we think about things with Deque. James talks a lot about problems that are either vitamins or they're medicine. You might take vitamins and you hope that things kind of are a little bit better. When you've got a real problem and you need to take a pill for it, you need to take medicine. And medicine is something that is a kind of a hair-on-fire problem. I need to get it fixed. And if you can find and identify that kind of problem and then build a solution for that, that's the foundations of a fantastic business. That's the start of something that can really grow into something huge.

Yeah. Let's stick with the medicine analogy here. If you need to take that medicine more frequently, Okay, because you're facing that problem often, then that is another good thing that we're looking for. We're looking for the frequency around it and how many people, as you said, are experiencing it. That's that classic market size. Is this just a small audience or can this be a bigger audience? Does it save people time? Does it save people money? If it saves people time and money and it happens frequently and it affects a lot of people, then you've got something that starts to become quite interesting. So that kind of framework about how you can approach it is quite helpful. The other thing that we need to also then look at is what existing kind of solutions are there? Is this something that's completely unserved or is there current workarounds that people are doing? Is there any competitor offering a kind of solution in the space at the moment? Have they got an advantage because they're already in play? Those are some of the things that we have to understand when you're trying to put a bit more context around that problem.

we sort of try and apply that to every company that we look at, every company that goes through the DQ program and becomes one of our portfolio companies. And it really is about trying to sort of kind of take that sort of Occam's razor approach. How do we get rid of all of those other bits around the outside of a problem or of a solution and just make sure we're either saving people time, saving people money, delivering on a particular kind of solution that really kind of solves a problem for somebody. And then the business can generate revenue from that. And then the key for DQ is how do you grow that in a sort of scalable manner?

Yeah.

How do you add the right kind of people into the mix? How do you add the right processes? How do you use technology in an effective way? All of those build those foundations so that when a founder has made that transition from sort of corporate into being the CEO and founder of their own business, they're really set up to grow A fantastic startup. One of our portfolio companies, Clever Benefits, which is based in Sweden. So, about 6 weeks ago, she landed her first paying customer. She has a benefits platform for large corporates in the Nordics. And when she landed her first customer, the excitement from all of us, from her, as well as from us, was amazing. It's fantastic.

Hi, I'm Caroline Sandqvist, the CEO and co-founder of Clever Benefits. I'm an HRBP as a background, but at one of my previous employments, COVID hit, salaries were going through the roof, and especially within the IT industry. And we did Great Place to Work surveys. There is one question that says, we have unique benefits. And I went back to our rewards team and I said, like, We have good benefits, but we don't have unique benefits. We're trying to balance like the total compensation package where we were like, okay, can we do something to be attractive on the market and be a little bit more unique, but don't follow this like pure salary race and also with like an enhanced flexibility due to COVID, but also new generation coming into the job market that's now used to this. We were based in different countries. So we were looking at the possibilities of swapping benefits. So for example, in Sweden, we had a lunch card, which is a benefit in kind. So you need to pay income tax on it, et cetera. What if you could swap that value to a benefit that is tax-free? For example, can I put it into pension or can I buy some extra time off for the money so I can like optimize the value? And there were a couple of platforms in the other countries, but as soon as we mentioned the Nordics, all of them was like, no, no, no, we are not doing Sweden. And I was like, we're so digitally advanced when it comes to tax declarations. We have so many apps for everything, but we realized when it comes to like the benefit landscape and that like ability to personalize and tailor-make my own package, it just doesn't exist. So, I actually went back to my manager and I said, like, do you know what? I'm going to start a side business. I'm going to have to do this. How would this work if I would buy this platform? What would I look at for me to even buy it as an HR professional? And that's also when I went back to one of my old colleagues that's a developer, and I asked him, like, I can't get this off my head, but obviously someone needs to build it. Do you want to build it with me? And he was like, yeah, let's go. And that's how we started.

Caroline and Clever is a great example of knowing that there's a problem there because you yourself have actually experienced that problem. I mean, we talk about that all as problem intimacy, and that's one of the key things that we look for. But not only have you experienced the problem, you also have some confidence that you're going to be able to win a first customer. In the case of Caroline, she herself would've been the first customer for this product had it existed. The fact that it didn't exist made her want to build it. Then the exciting bit comes, which is, okay, how many more people like this person exist? And I think that's when being very clear on who your ICP is and not your ideal customer profile, we're talking about that initial customer profile. Who is that person? How do we get very clear on who that person is? How do we go and find more of those people and then start verifying that those other people are willing to also pay for this solution to solve this problem? So approaching people through that warm network is a great way to start winning those first customers, getting feedback from those people. They're often, you know, you have a relationship so that they're willing to talk to you. They're not always going to tell you the truth. The Mum Test, that book by Rob Fitzpatrick, which teaches us how to get honest feedback when we're doing our user interviews. It enables us to ask questions that get a real response rather than people actually telling you things that they think you want to hear. An example of that might be, when was the last time you faced this issue? That would reveal a real action rather than, would you like to use this? That's not going to elicit the response that you want. That's going to get someone telling you something that they think you want to hear. But a key transition that we often see in that process is moving from selling to people within your warm network to actually selling to a cold network, people that you have no relationship with, and that effectively is cold outreach or kind of cold inbound coming in because your message is resonating with that audience. So that's another really important transition point. When you start to do that and you start to have more sales, people actually buying your solution, that revenue is coming in. What you get is you get this magical thing called data at that point in time. And with the data, you can start building out the profile of who that customer is. You start looking at, if we take a B2B business to sale to start with, and then we can talk about a B2C one, that B2B business, you're looking at the size of the company that is actually engaging with you, the sector or industry that they're in, the amount of money that they potentially have under their budget that they're willing to spend. Who is that profile of the buyer that you're engaging with? So you're collecting these different data points and you're seeing, how consistent that is across your customer groups. If you're selling B2C, you're much more thinking about the demographics, the psychographics, the location, and you're trying to understand who that customer profile is, what is their motivations for actually wanting your solution in relation to the problem that they're experiencing. So those become really interesting things that you can start to collect that data to understand your customer profile more. But it is a question of being able to find what is working and repeat what works. Often at that stage, one of the things that we're tempted to do is to keep changing things, and then it's very difficult to see patterns. So actually having that test and learn approach is very important and being able to repeat a message and just tweak certain points. to certain audiences really helps us in those early stages.

I think the other thing is that whole sort of failure to launch thing as well. I think it's really important to put things out there, even if they're not perfect. One of the things that we see often is people keep adding features, and if the platform doesn't have this, then I can't possibly sell it. And if my app can't do this, then there's no way I could ever launch it. And I think it's really important to what we call launch and learn, get something out there, get it tested, make sure that it kind of is doing what it should do. And if everybody's asking another feature, then you can add that in at a later date and then charge for that. But you have to get something out there. I've heard so many horror stories of people outsourcing development of something and adding reams and reams of kind of features and functionality, when the reality is there's only a very small part of it which is solving the problem.

Yeah.

You can get those features into platforms, but they always come later. The challenge is that when you've worked in corporate for a while, you tend to see a piece of software, and it does all these different things, and you can change all the colors and do all this sort of stuff, but it started out as probably a very basic app that did one thing particularly well, and that was why it got implemented. And so, it's important from a startup perspective to remember that, you know, you are just trying to solve that one problem first.

Yeah.

And when you've solved that problem, that's when you can start to sort of take advantage of, you know, the data that you understand, asking those initial customers, you know, what else would you like to see in this? Or how can I, you know, how might this work in a different demographic? a different geography. So those sorts of things are really important in terms of remembering to start and launch and get something out there and then improve over time.

Yeah. And I think just to reiterate the importance of the focus on the thing that is the most important thing, and that's the bit that actually addresses that problem. It can't be stressed enough how you have to remain laser-focused on that core value proposition that's solving that problem that really is the problem that matters to that customer and making sure that you're doing everything you can to focus things around that. That's very, very, very critical at those early stages as you're building things out.

Just remember that not all the feedback you get is equal. And it's really important to try and get that real genuine feedback because it's a tough world out there. There's a lot of companies, there's a lot of people vying for a limited number of dollars. And it's really important that what you build really does solve that problem and doesn't just look good and your mum tells you it's great.

And that's one of the challenges with your warm network, who's often your ECP, is the fact that they want to tell you good news. They don't necessarily want to tell you exactly what the problem is.

So one of the things that's really, really important to us at Deque is for the companies that we work with to get that first paying customer, get that first one over the line And because it's a real sort of benchmark for success. But there's a lot more to it than that. Getting one customer isn't the be-all and end-all.

Then obviously the goal is to continue to grow your customers in line with your revenue goals. And I think in that next stage of growth, the bit that we're really focused on is that repeatable go-to-market motion. And what does that mean? It means, can we go and find more of these customers? And can we do that consistently? And can we understand how much it's costing us to go and find these customers? So I think that, that go-to-market piece is incredibly important. And that's the bit that we focus on at Deque is once we've got those initial customers, can we then have that repeatable way in which we can do that more frequently to acquire more customers? At that point, the next thing that people often do is they'll often talk about growth targets of customers. Customer numbers. So it might be, okay, how do you get to 10 customers? And then how do you grow from 10 to 100 customers, for example? What we would tend to look at is rather than looking at the absolute number of customer growth, we'd bring it back to the business that you're building and the revenue model attached to it. So, you know, what are the revenue targets that we have? How do those come from the initial profile that we have of those customers, which is how much is someone spending with us? Over what period of time, you know, and that becomes the retention bit and the growth bit that we focus on.

And I think that the sort of the rationale behind that is trying to get an understanding of what it takes to repeat those sales. So once you've got those 1, 2, and 3, those initial sales, and you've got some cash coming into the business, that then helps us to sort of, I guess, forward plan. So when I was working at Investable, they're an early-stage venture capital firm, the key thing for them was that any startup had to have 5 paying companies as corporates as customers. And so that was their sort of benchmark. So they're super early stage, they only wanted 5 paying customers, but you had to have those 5 before they would even consider investing in your startup. So here at Deque, we want to get those first 1, 2, 3, and we want to have a plan to get to 5 or 10 or 20. Because not only does that open up opportunities in terms of, you know, maybe bringing in external capital, if the requirement, if that will really create a step change in how you can grow your business, but it But it will also help you understand what sort of revenue's coming into the business, help you understand what impact that would have from leaving your corporate job, that you might have a reasonable salary, you might have some savings. How long are those savings gonna last? How much of that revenue is gonna be used to kind of maintain the business? How much can be used for salary? All of these things only become possible when we have an understanding of What the customer is prepared to pay, how many of those customers we have, and how long it takes to land those customers. What's the sales cycle for your product? If it's a relatively low-value sort of product, then the sales cycle might be quite small. But if you're selling a big solution and it might be quite expensive, the sales cycle might be quite long. So we've got to sort of factor all of that in so that we can build the sustainable business, which is going to continue to grow.

And that really what you're talking about there, Ol, that's the basics of your unit economics of your business. Which is what is the cost of acquisition for the customer? Key input. How much revenue can we earn from that customer over a period of time? You know, that's your annual revenue that you're getting from them. And over a period of time, you know, once you learn more, you'll be able to look at the lifetime value of that customer. And those are core things that drive the value of your business as you grow and scale. And I think if I just come back to what you said there about investibles criteria, which I think is really interesting, then they're effectively saying, well, we need a company to be post-revenue in order to invest in it, and we want to have seen a certain amount of traction. So they're defining that traction as having won 5 customers. So why are they saying having won 5 customers is important? It's because that really gives you some confidence over the validation of there being a problem And then you having a solution that people are willing to pay for. So that is a great way of looking at how do you actually validate something in that early stage. Now, that isn't showing that you have product market fit. That isn't showing that you've actually been able to scale your solution to more customers. That comes later. And that's where we start talking about how do we actually grow the number of customers we have effectively? How do we scale to more customers? And then what are the unit economics as we scale? Does it continue to cost us the same amount? Do they continue to pay us the same amount over what period of time? So those become really important things that we're able to build into that business model, which becomes very important as we get ready for pre-scale, that kind of phase in Deque during the build phase of the program.

I guess a really good example of how Deque works and identifying a problem would be one of our portfolio companies called DealerDoc. So, DealerDocs is a car sales commission solution based in the UK. There were sort of 2 guys, Richard and Gareth, who had sort of conceptualized this. Richard came up with the idea. He was working in a car dealership in the south of England, and he was finding that one of the most annoying things for salespeople was that when they had earned a commission on selling something, whether it was, you know, extra tires or windscreen protection or whatever it might be, whatever the car sales was trying to sort of incentivize from a sales perspective. They had an idea in their head of what the commission was going to be, but it never worked out that way. They thought they might be getting £15,000 at the end of the year or £5,000 at the end of the month. But when the month came around, it turned out it was only £1,200. And he saw this frustration firsthand. And he just, he went and spoke to the manager there. And he was sort of talking to people about trying to understand why it was that it was that expectation management. When a salesperson thinks they're going to earn some money from selling something, and then they find out the following month that they didn't get that, they're immediately disincentivized. If you tell them they're going to get £500 and they receive £1,000, they're super happy. If you tell them they're going to get £500 and they only get £350, they're immediately looking for another job. So that was a problem that he identified. So he came up with a very complicated Excel spreadsheet.

Yeah.

Which accurately calculated the commission for salespeople and allowed the managers of the car yards to sort of pick different things that they wanted and add a commission to something and incentivize the salespeople. And then at the end of the month, everything sort of fed into the HR system, and the salesperson got exactly what they were expecting. And this meant that they were incentivized to the next month sell even more because they knew they were going to get commission. And when we first spoke to Richard, what he'd done is he'd actually sent his Excel spreadsheet to another car sales company and had said, you know, this looks great, this is what I've been using here. And he was trying to sort of sell the Excel spreadsheet. Unfortunately, because it was in Excel, they just started using it. He didn't receive any money. They just sort of stole his idea. And he came to us to talk about how he could kind of take this and build a business around it. So what we did was we kind of worked with him to identify, you know, kind of what the problem was and how many people it affected and how large the market was. But we also then took his Excel spreadsheet and moved it into the cloud. We created a sort of a user logon and a system that meant he could open up to multiple sort of car salespeople and have the managers sort of incentivize their sales staff in different ways. We got the first sort of initial customers, and then we raised £450,000 from an angel network in the UK, which enabled him to sort of become full-time sort of founder and CEO of his business, DealerDocs. And they're looking at opportunities across the Middle East and in Australia as well. So enormous kind of like, kind of sort of opportunity in terms of how people are doing things. And by moving him from a sort of a kind of manual Excel spreadsheet into an online platform, it sort of changed the way his business operated. But the first part was that he came to us having really sort of understood a particular problem that was leading to high staff turnover, lack of sort of incentives for sales staff, and was a real issue for people within his industry. And he then went away, solved it, and then came to us. We expanded on that solution and sort of really drilled down into what the problem was and kind of built a business around that.

Yeah, I think that's a great example, Olav, Focusing on a real problem. You know, this was something that salespeople were experiencing. It was creating pain points that had a material impact on business performance, and that's always a good one. If you if you can tie back solving that problem to creating a tangible improvement in the business, then that can either you know drive more revenue. You know, in this case, those initial sales reps were actually performing better, so more sales were coming into the business. It also had that material impact on less people leaving because of that dissatisfaction. They understood what their sales incentives were, and they were therefore less likely to leave and go somewhere else to try and earn some more money. So that transparency that it created had that material business impact. So I think that's a great example of being very focused on that problem. And the solution obviously wasn't rocket science. All he was doing was taking a rather complicated Excel format, putting a good user interface over it, but then putting it in a solution that could be accessed by more customers that had the same problem. The critical thing that we look for at Deeque, it's really about people who are solving those really important problems. We're really excited about people who are very excited about a problem rather than those people who kind of think that they've got a solution that's going to change the world. We don't necessarily need you to have the solution all figured out. That's where we can help you really validate that problem and then shape the right solution.

Yeah, I think that's exactly right. We're looking to help build businesses. And so, we're not subject matter experts in all the different industries and businesses out there. What we do know how to do is help people build companies. We really understand that early stage of what it takes to build a business and identifying what the problem is and understanding how that problem can be tackled is something we want to work with you on and solve those problems so that we can build incredible businesses.

Yeah. Problem-first thinking, not solution-first thinking. That's what we get excited about. So, you know, we're not interested in sexy decks. We would like a decent solution, but that's not what we get excited about. What we get really excited about is a sexy problem, a really important problem that matters to people. It matters to you that you care about solving this problem. That's what gets us out of bed in the morning. Next time, we'll move from the problem and the validate stage into the build stage. And that's where we start focusing on an MVP, a minimum viable business.

And we'll be talking about how in that build phase, it's not just about what is actually built. It's about the foundations of your business. It's about the solution that will form the foundations of your company. So look forward to speaking to you next time. I didn't really have an ending in mind.