The 5 Hows
Predicting Whether A Founder Can Build A Successful Company
This week’s post is for investors and those looking to join a startup. It’s for those trying to predict whether or not a founder will be able to build a successful company.
The other night my husband and I were discussing which founder traits best predict whether or not they will successfully build a successful company. We agreed that a vision is important and is often the reason why people join or invest in a company. However, if a founder can’t execute, the vision is effectively worthless. But how do you test for ability to execute, especially at an early stage?
Most people are familiar with the “Five Whys” approach to testing how deeply someone understands something — for example, how deeply a founder understands her customers’ needs. However, while a good strategy might depend on a deep understanding of why things are the way they are, the ability to execute depends on a deep understanding of how things get done.
So, perhaps a good way to test whether a founder will be able to execute on her grand vision would be to ask her five “how’s”.
The conversation might go like this:
Founder — In two years we will have $2m in ARR.
Investor How #1 — How are you going to do that?
Founder — We think we will be able to sign up 400 customers by the end of 2021 on annual contracts, paying $5k a year.
Investor How #2 — How are you going to find and sign up 400 customers?
Founder — Our current customers have come in through contacts we have in the industry. After we close this round of investment we are going hire a Head of Marketing and Head of Sales. They will build up our customer pipeline and convert the customers.
Investor How #3 — How are they going to build that pipeline, or are you depending on them to figure that out?
Founder — Our marketing channels will include social media, paid ads, attending conferences and email marketing. We will also set up an inside sales team.
Investor How #4 & #5- How did you come up with that list of channels and how are you going to prioritize them?
Founder — We have talked to our current customers about how they discover technology products and they mentioned all of these channels. We plan on testing each of these channels, doing a cohort analysis on new customers, and tracking the cost of acquisition and conversion rates. We have a rough template to help us decide which tests to conduct and a way to track the results and share them with the team so we can learn from each of the customer acquisition tests. I can show you those if you would like.
In this fictional exchange, the founder has demonstrated a clear and well-conceived execution plan that would give me comfort that, in addition to having a great product idea, she also knows what needs to be done to bring that product to market and build a healthy sales pipeline.
The purpose of this “five hows” exercise isn’t to test the founder’s ability to predict the future. We all know that startup managers need to be flexible and respond quickly to new facts as they come to light. But by pressing beyond one or two follow-up questions, we are able to test just how deeply the founder understands the business she plans to build. The founder may not have all the answers but she better have a systematic approach to figure out those answers.
