Treat your investors as mentors

Tip for founders who are starting to build or nurturing relationships with potential investors: frame the conversation as if the investor was your mentor and ask for advice, being extremely open-minded, curious and ready to learn. Take notes and summarize the take-aways before closing the meeting.

Don’t expect straight-forward feedback as most investors won’t do it. Start the relationship-building process well ahead of fundraising and make the investor feel that she/he is adding so much value through the mentoring process that they’re willing to keep doing it. At the end of the first meeting, appreciate the insights and lessons learned and ask deliberately if she/he is willing to mentor you and meet again in the next 4-6 weeks.

As a founder, you want potential investors to be feel like partners who build together, not like critics who are distant and hands off.

What is product-market fit?

For early stage startups (pre-Seed and Seed) there is only one thing founders should obsess about: finding product-market fit (PMF). As the company gets started, it is much better to have a small group of customers (ideally acquired at a low cost) highly engaged with your product than a large audience that superficially engages. I am convinced that a company has achieved product-market fit when a relevant part of their users demonstrates to love the product so that they pay the right price, recommend it to other users and use it again. It’s important to highlight “paying the right price”, because constantly offering a product or service subsidized leads to a false positive result. It’s better not to deceive oneself and to look at the data in a cold and objective manner, practicing the right price (meaning a healthy contribution margin, ideally above 50% for software).

A clear example is iFood: back in 2017 I was the Chief Strategist when we analyzed our customer cohorts and it was evident that for every 100 customers who ordered food for the first time, 30 would keep purchasing at least once a month for the next 30 months (that was the cut for life time value (LTV) back then). This, combined with data on user and restaurant profiles in most Brazilian cities, made internal investment decisions easy: we knew the LTV of each customer and were willing to invest up to 30% of that amount to acquire new users, understanding that the untapped market was huge (back then most people were still ordering food through the phone). The internal data on customer behavior (retention and reorder rate) proved product-market fit, which combined with the external data on the size of the opportunity made it obvious for investors that the company would turn investors’ money into valuable customers who would stick around for the long-run and pay for their service. A company with clear PMF and a large, fragmented, addressable market is an amazing asset to investors as it can leverage capital to create a dominant player that at some point will generate handsome cashflows. Of course markets are smart and there are competitive pressures in industries that grow fast and with margins, so innovation, focus and execution ability are key to win. Here we know the story of intense competition with UberEats and Rappi.

The goal of a pre-Series A company is to prove PMF, so all company resources should be dedicated to it. The CEO should do all sales in the beginning, the CTO should be talking to customers frequently to understand user pain points directly, marketing should be hyper segmented to understand the messages that resonate the best with different target audiences that may best engage with the product. Raising a Series A without PMF should be interpreted as a sign of “the market is giving us a second chance to prove PMF”, and not as if the company is all set to grow doing more of the same and there’s only reason to celebrate.

Below is a dummy example of a beautiful cohort analysis showing the percentage of users who remain active since account creation, using the product with a minimum frequency to be defined as “active” (can vary from daily to monthly use). How do your cohorts compare?

Finding PMF is difficult, and only a few companies achieve it with their initial product. After pre-Seed and Seed rounds of fundraising, I have seen teams pivoting and eventually finding something that works, but the reality is: the more knowledge you have about the problem you want to solve, who your customer is, and the solution you want to offer, the greater the chances of hitting the target and starting your company off on the right foot. It’s much cheaper to test the actual size of the problem, the ideal user, and the attractiveness of your solution before raising a hefty investment round.

Leading with less: the benefits of executing with scarcity

Nobody wants to go through it, but when we’re forced to, it turns out to be for the better. The reality is that, for the venture world, most of the new generation of entrepreneurs and investors have been educated in a time of abundance, with easy access to capital.

Raising round after round within six to nine-month windows became the norm. When money is easily found, it is also easily spent. During times like these, offices became nicer, overhiring was a common practice, and there was little concern over customer acquisition costs. Incentives were used to retain customers, as we know from the large number of coupons offered by companies like Rappi and Uber. Have you heard of the term VC2C? Well, it stands for Venture Capital to Consumers, which reflects the scenario I just described.

Now, the tide has changed dramatically, and those who can adjust with speed and a positive attitude will benefit the most. If you’re starting afresh, it’s easier because you won’t have to change habits. If you’ve raised in 2019-21, it will require more effort, but it should pay off. It’s important to keep in mind that Venture Capital money only came into place in the 1960s in the US and became more popular in Latin America around 2010. Before then, companies were created out of founders’ capital and with a lot of sweat. Entrepreneurship has always been a reference to hardship, resilience, and resourcefulness. Today, I spoke with a founder who is going through this process, and in her words, “We now have the mindset we had prior to fundraising. We’re doing a lot with very little.” Now that she has a plan in place and has accepted that she will not raise any time soon, she is energized and driven to make her company happen (this was not the case when she was trying to fundraise unsuccessfully). So, let’s go to the quick list of benefits of executing with scarcity:

Resourcefulness and creativity: This means finding creative ways to stretch your budget and make the most out of every opportunity. You will have to learn how to prioritize your spending and focus on the areas that will generate the most significant return on investment. By doing so, you will develop a keen sense of resourcefulness that will serve you well throughout your business journey. My recommendation is always the same: for early-stage startups, the goal should be finding product-market fit, which stands for having growing customers who are consistently engaged and paying for a product or service.

Agility: When you don’t have the luxury of a large budget, you have to be nimble and adaptable. This means being able to pivot quickly when a product or service is not performing as expected or when the market shifts. This also means making adjustments to team size and profiles quickly. With limited capital, your decisions must be swift. This will create a culture of strong performance that, if well-managed, will retain and attract those who are willing to fight with you over the long run. Of course, always communicate candidly and warmly.

Focus: Running a startup with little capital can help you maintain focus on what is truly important. When you have limited resources, you must prioritize what is essential to the success of your business. This means focusing on your core business model and avoiding distractions that can lead you astray. Priorities should be discussed on a weekly basis with the leadership team and on a monthly basis with the company at large. I recommend following the funnel model: start with the purpose of the organization, go to values, dive into goals, and then highlight the priorities needed to achieve these goals. People need to be reminded again and again why they’re there, what they’re trying to accomplish, and how to do it.

Let’s end with an old and reassuring note:

“A smooth sea never made a skilled sailor.”

Franklyn Roosevelt