How An Investor Will Review Your Startup Idea

Hello everyone, this is Gopi, Gopi Mattel, CEO, founder of MaxBlox, an open source platform as a service application development platform. I'm also a director at Foundry Institute. I live in Silicon Valley, USA, but help run a chapter in Chennai, India, and Here's the name, and, you know, today we're going to be talking about how good your idea is to investors. So our framework is the Founder Institute program, but we are looking at your idea from the very specific point of view of the investors. Like, is your idea fundable? What do they look at, right? By the way, you— I am available on LinkedIn, so you can connect with me there. I have some tools that, that correspond to this particular program that I can share with you if you request using LinkedIn. So the thing about idea— ideas are that, you know, even though they are smaller in terms of importance to your success compared to execution, you know, and I think it is true that execution is the bulk of how you become successful. The idea is also crucial and you have a limited amount of ability to convince investors. Investors are still, it's still an art. It's not really a science yet. So they have rules of thumb by which they judge your ideas. So we're trying to, figure out, to put some structure around, or some method around this madness of how to select your idea, how to pick the idea that is most likely to be funded. That's really the goal of this particular speech. Okay, so we are going to be looking at about 10 criteria that makes an idea more fundable, okay. So what we recommend in the Founders Institute, of course, early on, is to not be too tied to the idea you come in with, because it doesn't have real due diligence around it a lot of times. So we recommend that you pick 3 ideas, and then you try to evaluate all of them and try to pick one before you have your idea review. And so pick 3 ideas, and then these 10 criteria I'm gonna be talking about, try to rank them 1 to 5, 1 being least valuable, you know, value for that particular criteria, to 5 being most valuable. And we can do some extra things, like we can weigh ideas differently. You can say I want, this is more important and the others are not. So let me just switch over a little bit. So what are the ideas we're looking at? And like I said, I will consider 10. And as we go through it, this is really— it's methodical, but it is a little bit subjective still. So different people will disagree. On exactly the order I'm presenting it in. It's going to be presented least important criteria to most important, so it can change. And, and also there may be one or two other thoughts that other people consider, uh, to be added. So that's all okay. You just want some structure to work with. So the first thing I would say is what we would call, uh, the— in some sense, least important. Okay. Cost of launch. Okay, cost of launch, which is basically— I'll try not to drop everything here— which is basically what does it take for you to get into the marketplace, produce your product, and startups. So now, this is important to investors because they want to invest a small amount of money and make a large amount of money, okay, simply put. So the venture capital, my focus will be a little bit more on the venture capital and less on angels and so on, but no, but it largely applies in every case. So like in most cases, when they invest in 10 companies, they want each and every company to return 100x because they assume that 9 of them will fail and only 1 will succeed. So getting a 10x return is not as good as getting a 100x return because then 100x means their entire investment will be paid off across all 10 companies. So they're really looking for a small amount of investments. If they put in a, $1 million, can they have the potential to earn $100 million, right? That's the thing. So how much it takes you to build your product and launch is going to matter because now if it takes a lot of money, then they know that making that return is harder. So cost to launch is a criteria, not a very important one, but it is important. So you can imagine various types of companies, right? You can think of building an app and putting it on Apple Store and Google Play. How much effort is it? So you really are looking at building the application, you know, if it's a simple consumer application, and going through the process of loading it and doing some marketing to make sure it's released. So the effort is really the complexity of the application. Similarly, building just a website is also similar, perhaps, in effort, right? So consumer website, like, you know, you're putting out bank rate information for loans and mortgages, and you're going to make money by advertising, right? That's, that's not very much money to get set up. But if you look at, let's say, a software application, a SaaS application that's multi-tenant for different customers, it is available on mobile, it's available on the web, it has to integrate with other systems, right? Now that's a heavy amount of development, much more than probably the app or the website. So now the cost of launch has gone up. But then you go to like some other, uh, potential startups. Uh, let's say you decide that you are going to do IoT, uh, Internet of Things. Now you need devices, hardware, production. That's more expensive, right? Or let's say you're doing machines or, or construction. That really requires a lot of capital. So How much does it cost becomes a criteria. So the lower the cost, generally the higher the ranking. You go to more like a 5 or so. The higher the cost, the lower the ranking, okay? So think of it as points you're giving to each criteria. So you're looking at trying to get a low cost of launch, okay? But by the way, it doesn't mean that you always have to go for the low cost of launch. Sometimes you want to go for the high cost of launch because it makes other competitors, they also have the same problem. They also have funding issues and getting the money and so on. So you may have, if you have the right backing and you have a solid idea and your patents and so on, maybe going for a high cost of launch may be okay. So you can definitely rank based on what you think will happen in regards to the marketplace and competition. So the next criteria is what we would call a competitive criteria, which you can consider how much competition you have and what type and how you're going to compete with them. So you could be a greenfield competitive space. So what we are here looking at is a greenfield, or sometimes called a blue ocean. It's an area where there is literally no— nobody, no large companies, not many startups. It's brand new and you're creating it. So That is good because you don't have to worry quite so much about competition. So areas for consideration are new technologies like IoT, augmented reality, virtual reality, artificial intelligence. These are all brand new areas that the large incumbents, large companies don't have much technology at all. And so you will have an advantage. But there's also the disadvantage that now you have to educate people that this new technology is going to work, it's going to be useful for them, et cetera. But generally speaking, greenfield is a good, good thing to have. A blue ocean is a good thing to have. But you also, sometimes you don't have the luxury. You have competition and you can evaluate, okay, is there going to be entrenched hard competition particularly other startups, okay. Large enterprises are less competitive to startups than other startups, okay. So if you're like doing Uber, you're not worried about taxi companies, you're worried about, you know, Lyft and Ola and Zipcar and other companies, okay. So startups are potentially more of a threat there, but to all of these you need to think about a barrier to entry. Do you have a strong barrier to entry, okay, that can stop others? Do you have partnerships with people that are exclusive so that others cannot partner with them, right? Do you have, uh, like if you're Uber, do you have partnerships with all the airlines so that as part of their ticket they can get an Uber ride? So now others cannot get that because you already are in there. That's the barrier to entry. Another barrier to entry is, do you have a core patent or set of patents that will stop other people from getting in there? So these are potential, okay? So that's another area. So the second thing, but again, it varies. Sometimes, you know, having competition in enterprise, large companies, may be good for you. The third area is what we would call customer commitments. This is also variously known as, uh, uh, customer, a product market fit, um, or traction. Traction is probably the most common way of thinking about it. And we look at this as, have you considered in customers as part of your idea and what is their reaction and how much of a commitment do you have from them. This can vary. It could simply be surveys and interviews. If, like, a lot of startups go out and, you know, if you're in Founder Institute, you will know that customer validation is crucial. We want you to talk to customers. So that's like the bare bottom line. But many other startups, they'll just build a product and then start hunting to see if they can find customers. That's, that's definitely a bad idea. So customer validation surveys and interviews are like the very basic customer validation, and you can get some data and say like, yes, customers want this, customers are willing to pay for this, they will pay this much to use it per year. These are all good information, but you can go further. So one of the things we do in our chapter is to As part of the validation, we ask our founders to get letters of intent. So you go to a customer, you present your full idea and say, if I were to build this, I mean, if I were to price it at this level, would you buy it? And they— you want to get to a yes because the value should be so compelling to them that they say, absolutely, I want that. At that point, you want them to sign a simple piece of paper that says You know, if this product is built and if it is at this price and if it is, you know, satisfies all the needs I have, then I will buy this software. I mean, that doesn't have to be binding, but they have at least put it on paper. Okay, we call it a letter of intent. So that's very, very good because when you go to the investor and say, look, I have a letter of intent from American Express and the Gap and Ford Motor, they— oh wow, people have looked at it, people have put their name on a paper, piece of paper, they like that. So that's good. You could do even more. You could actually find a customer and do a partner project. You can say, listen, we, you know, we know you need it, you don't have to pay us anything, but partner with us to build this product so that once you build it, you'll be a customer. But partner with us. And they put in time and effort, they don't give you money. That's still worthwhile. That's more better than letter of intent. Or you can do a proof of concept. They give you a little bit of, uh, you know, they do a contract, they say, here's our spec, you build it, if you prove it to me, then I'm going to buy. So it's more agreed upon, more of a contract. Then finally, actual revenue, right? You— they give you money to build it, or they give you money to use your software. So this is customer traction. You want to get to one of these areas. And so that also, depending on where you are, you go 1 to 5 on that. So we talked a little bit about this early on, uh, how difficult is it to build your solution? Okay, so I, I say it's technology difficulty because a lot of startups you know, really are trying to be, at least to be able to be funded, you tend to be more technology-oriented. Okay, it doesn't have to be, but it's extremely common, and it gives you that advantage in the marketplace that you need. Okay, so technology difficulty— how difficult is it to build your technology? Okay, so now the thing here is that it's similar to that first point, like how much does it cost. A lot of times it correlates but not always. So like a website, like the bank rate website I mentioned, will be easy to build, would not cost very much, but it's also easy as a technology. You don't have to solve any major problems, right? But if you were doing an app, it's a little bit more complex. If you're doing some, uh, some technology like artificial intelligence, you have to learn a lot. It's not necessarily more expensive, but you definitely need that expertise, and you have to learn a lot, and you have to try a lot to actually build out what you want. So the technology difficulty, uh, the more difficult it is, the more chance of you failing, right? So that is a criteria, and you can rank that You know, there are more difficult things like a SaaS application, you know, something that's available around the globe, that's internationalized, that understands like formatting of currency and language, that has different databases by different customers, that has security that corresponds to different countries' security requirements. All of this, right, could be complex. That's a difficult problem to solve. And then, and at a higher level would be hardware. Anything that requires actual material products are probably much more complex than any of these. So the difficulty of your problem, uh, this all also matters. And typically, the lower the difficulty, the easier, uh, you can launch. But it's also can be counterproductive because so can your competitor, right? So sometimes it may be better to go high difficulty. So you have to evaluate and rank it and see like which one would be better. If you go high difficulty but you also have a high barrier to entry, that may be the best combination. Okay, so sometimes it's okay to combine them. Next, I would say, is what we call ease of sales. A lot of these criteria that I am covering, you won't hear it outright from the investors. You'll hear it in sort of like, they'll just ask questions and they won't say, you know, here's ease of sales, how good are you on that? So it's not, as I said, scientific. But if you went to an investor and said, oh, you know, I'm going to reach out to small business, you will see this reaction from them that says, oh, I'm not sure. They will find it much easier to go to a consumer marketplace with millions of people or to enterprises with a few companies. So consumer marketplace, you know, it's all probably web-based or application discovery kind of options, but the enterprise will be more direct sales and— but few customers with large amounts of money. So, but if you try to do small business small amounts of money but a lot of high-touch sales. So they will struggle with that. So, so you have to know what your— how easy is it going to be to sell your product. So the simplest, I would say, is something that's viral, right? Any social, social network, any kind of chat app, these are all viral. Once you put it out, The people that are using it, if you do your job right, will automatically push your product out. So that's the best and easiest way of selling your product, okay? Then you may have websites. Websites are also easy to market because you just have to go after Google, make sure that you come up high in the search results so people find you. So websites are not that difficult to sell or get customers logged on. Application, an app on your phone, is a little bit harder. You can make it, and maybe if it has a viral characteristic, like you have a chat app, it'll, it'll spread. But other apps, the problem is that there are millions of apps. How— and, and people, when they look at their phone, they can see only a few apps. How do they find your app? The problem is called app discovery. So that's much harder. Then you have direct sales. Direct sales is literally having somebody on the phone, talking to the customer, showing the product, and convincing them. So here's where that small business versus enterprise problem comes in. So that's like a harder problem to solve, okay? And finally, channel sales. To do channel sales, you first, the channel must exist, like, you know, Things like web can be channel, but also there can be resellers out there that you have to reach out to. Like if you're selling, let's say, you know, I don't know, HR software. So you want to find consultants that are doing HR consulting and see if they will recommend you, or you want to find systems integrators that will integrate your software. So you want to go to them, but you know, you can sell to your customer and solve their problems, but when you go to a channel, you have to be much more prepared. You have to have your product so good that you can actually train them so they can implement, they can sell your product. So that's much better, higher barrier. So ease of sales is also another criteria that you want to evaluate. Okay, so that's— we covered about 5 of them, and we have a few, 5 more, and I'm going to quickly cover those as well, and we'll just keep going until we finish it. This is what you'll hear a lot. This is where the important things start coming by. Passion. Passion. You'll hear this often. Passion. So they really care about this because passion is also commitment. How committed are you to this idea that you want to that you want to start. The reasoning is that if you really, really love this idea and you're really a committed person for that idea, when problems happen, you'll stay with it. You will not walk away. Okay, this is the fundamental part of it, that level of commitment that passion brings. That's what the investors are looking for, because in a startup, problems are guaranteed to happen. It is going to be a struggle. It will be very stressful, and if you don't have that passion for that idea, and if you're just doing it for money, for example, even though this is all about money, investors know that you could stop working, and you're crucial for this idea to run, so they cannot afford that. So they're really looking for passion. So you want to have the one— the 3 ideas that you have, you want to find the one that you love the most, that you're committed the most, The one that you would do even if nobody gave you any money, that you just keep doing. That is super important. So passion is very, very critical. So rank those, your ideas across them, because bad times are in front of you and you need that ability to stay with the idea. Next is experience and skills. So when you go in and say, do I to an investor, hey, I want to get funded for this, you know, let's say a construction idea. I'm gonna construct buildings, I want to be funded for this. The situation here is that they see a lot of you. They see thousands of you. And a lot of people are, they may not really— they may just think they have this idea and they can do it, but they really don't have the underlying capacity. For example, if you hired a person and they came in and said, hey, I'm going to do accounting for you, you wouldn't automatically think, yeah, they can do accounting. You would look at their resume, you would talk to their prior customers, you would see what degree they have taken, you would ask them questions. You do all of this before you would hire them. So why do you think just because you say, I, oh, I'm gonna do artificial intelligence, that the investor is going to say, oh yeah, here's my money? That's not gonna happen. But how do you get across that? So what they're looking for is experience. Do you have a track record in the area that you're trying to start your company so that I can say, aha, at least I know that this person knows something about this area and that I may not know as an investor. So anytime you have experience, the level of risk for the investor goes down. So when you have, you know, if you have 3 or 4 ideas, lean towards an idea where you can say, I worked in that area, I know what that is. I'm doing an insurance startup, I was in an insurance company all this time, or I was an insurance broker. Okay, I wrote insurance programs, something. You need that because that reduces that level of concern and risk the investors may have. Because of that, you will have contacts, you'll know some serious problems, you may already know prospects that would buy your software, so it's really valuable for them. Okay, next is value of the idea. Okay, you will hear this sometimes phrased this way: is your idea a vitamin or an aspirin? A vitamin idea is a nice-to-have. It would make me feel better, people are saying it's a good thing, but if I didn't take it for like a month, it's no big deal. Okay, so it's that kind of idea and getting people to buy into that. Takes effort. But an aspirin is, I have a splitting headache, I need it right now. I don't know, like today I may pay like 10 cents, but I'm traveling somewhere, I need that 2 aspirins and somebody says it's $10, you will pay the $10 because you need it right then and there. So you want the aspirin idea. So whenever you look at your idea, evaluate whether it's a nice to have, that people can do without or whether it's compelling and they must have. So things that save costs for companies, for example, are more like an aspirin. Things that make them look better, et cetera, you know, their website looks nicer, maybe more like a vitamin idea. So really try to go for the aspirin. I know it should be, it should solve a painful problem. It should satisfy some primal need, okay, something that's crucial. Like for example, dating websites, dating applications, it's a primal need that people are looking for, okay. So you wanna solve something crucial, you wanna save time or money, these are all aspirin-like ideas, okay. Or it solves some regulatory issues. Here's— again, you'll hear this a lot. These are the areas where the more important things that you would be familiar with because you hear this all the time. Scalable. Is your idea scalable? What this means is that, simply put, to sell one more copy of your product, do you have to spend one more amount of money. Okay, so for example, if I'm making a pen and I'm selling it for $5, to make the next pen and sell it— to sell the next pen of $5, I have to spend $2. Okay, every pen, $2, right? So this is the expense, and the $2 also means more staff, more support systems, all of that, right? So there's all this overhead. So that's one, one, one type of sale and production. The other is, let's say you have an app at the website. To sell one more copy of the app, what is your extra cost? Nothing, right? So the pen is not scalable because the cost rises with the sales. It won't rise quite as fast for probably, but it does rise heavily or correspondingly with the sales. But the app is scalable because as the sales rises, the cost does not rise anywhere at the same rate, okay? It rises at much, much lower rate, and that means that a small amount of investment gives large amount of return. This is extremely important for investors. So you really want to veer heavily towards Scalable ideas, okay? That's very important. And finally, market size. How much revenue is there? Remember, they want to give you $1 million and make $100 million. That means for the— for you— for them to make $100 million, you have to probably sell a billion dollars. Is there a billion-dollar marketplace for you? Market size is extremely important too. Okay, and that's the final thought here. And by the way, you can keep texting and asking questions or contact me through LinkedIn and, you know, ask questions. But market size, you know, you have to look at, you know, the overall picture. Now, if you did, let's say, you know, I'll use the construction example. You know, are you constructing only in your country or are you constructing in multiple countries? Because you may be limited to countries, right? And if your country is small, your market may be small. Okay, so that's one thing. Or are you going to only do commercial or residential or both, right? So these all can change your market size. So you really want to look in software market size. The price point is low, but it could maybe compare and compass the entire world. Easily, right? So even if the price point is low, like Facebook's price point is zero, but they have the entire world as a market in terms of advertising, right? So that's, that's powerful, right? No construction company is going to be as big as Facebook, even though construction company each deal may be worth half a million dollars, a million dollars. So market size is probably the most important thing of all of these. But you can see these You would have heard, others you may not have, but these are the criteria people are looking at. So the important thing is you rank all of them 1 to 5. You can even weigh them, you know, you multiply this by a higher number, the lowest one we multiply by lower numbers, you weigh them differently and you get a result and you can compare each of them and say, hey, which is my best idea? Okay, now that you can do, you just type it in as Excel spreadsheet, take this 10 ideas, you can do it, it's easy enough. But I also have a spreadsheet that does that for you. So if you want, again, in LinkedIn or connect and just say, hey, can you send me that spreadsheet, give me an email, I'll send it to you. And at the end of the program, I want to say thank you for being here today. I appreciate your time. I wish you the best of luck in your startup endeavors. You know, you guys are out there changing the world. This is crucial for our world, what you do. So I appreciate your time. Thank you.