1. Identifying Good Problems:
Key Characteristics:
Investors seek startups that address significant problems characterized by being popular (affecting a large or growing number of people), urgent (requiring immediate attention), mandatory (compelled by regulation or necessity), frequent (occurring regularly), and expensive (costly to ignore). Startups solving such problems are more likely to capture significant market interest and generate strong demand.
Market Indicators:
A "good problem" typically exists in a market with a substantial user base (1M+), growing at a healthy rate (20% per year). The issue should be pressing and timely, with a market size valued in the billions. Changing regulations or societal trends that amplify the problem’s urgency are positive indicators. Additionally, the problem should be frequent enough to justify recurring revenue (e.g., issues that arise hourly or daily).
Red Flag - SISP (Solution In Search of a Problem):
A common pitfall is building a solution for a non-existent or insignificant problem. Investors are wary of startups that have developed a product or service without clear market demand—this is known as a Solution In Search of a Problem (SISP). If your startup cannot clearly articulate the problem it solves, investors will see this as a major red flag.
2. Unfair Advantage:
Founders:
A startup’s success often hinges on its founders. Investors look for exceptional founders who possess unique insights, skills, or experiences that make them stand out (1 out of 10). This could include deep domain expertise, a track record of successful ventures, or an ability to execute with speed and precision. The right team can navigate challenges and outmaneuver competitors, providing a significant edge.
Market:
Operating in a rapidly growing market is a major plus. Investors prefer markets that are expanding at a rate of at least 20% per year, as this indicates robust demand and the potential for significant returns. Startups in such markets can scale faster and capture larger market shares, making them more attractive to investors.
Product:
Investors are drawn to products that are not just incrementally better, but exponentially better—10x improvements over existing solutions. This could be in terms of performance, cost, user experience, or convenience. A product that offers a dramatic improvement is more likely to disrupt the market and attract customers quickly.
Acquisition:
A startup that can acquire customers at zero cost ($0) has a significant competitive advantage. This might be achieved through viral growth, strong word-of-mouth, or network effects. Low or no customer acquisition costs enhance profitability and scalability, making the business model more sustainable and attractive to investors.
Monopoly:
Investors favor startups with the potential to achieve a monopoly or dominate their market. This could be due to unique technology, strong brand loyalty, network effects, or regulatory advantages. A monopoly position allows a startup to set prices, capture outsized profits, and fend off competitors, which translates into high investor returns.
3. Pitching with "Using X for Y" Approach:
Leverage Familiarity:
The "Using X for Y" approach is a powerful way to quickly convey the essence of your startup by referencing a well-known company (X) that investors already understand. By drawing a parallel, you make it easier for investors to grasp what your startup does and why it matters. For example, "We’re the Airbnb for office spaces" immediately communicates the concept in a familiar context.
Relevance to Target Market:
It’s crucial to articulate why the target market (Y) needs or wants what X offers. Investors want to see a clear and compelling connection between the solution and the market’s needs. If Y (your target market) has a strong desire for what X represents, it validates your business model and increases investor confidence.
Market Size:
For the "Using X for Y" approach to be effective, Y should represent a large and growing market. The bigger the market, the more potential there is for your startup to scale and achieve significant revenue. Investors are drawn to opportunities where the target market is substantial, ensuring that the startup has room to grow and generate strong returns.