Talking to Customers Isn’t Enough
Angular Ventures Weekly Issue #210: For the week ended January 30, 2024
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Talking to customers isn’t enough
David Peterson
There’s a myth that most successful startups begin with an ingenious, hard-won insight. The founders leverage their industry expertise to identify a gap in the market, build a product to fill it, and customers flock. The reality, of course, is way more complicated. Real founding stories come in all shapes and sizes. There’s the hard pivot (e.g. Odeo to Twitter), the “why-don’t-we-just-commercialize-this-awesome-internal-tool-we-built” (e.g. Tiny Speck to Slack), the gutsy “build it and they will come” (e.g. Airtable, Notion, most consumer applications you use), and everything in between.
Point is, regardless of the approach, no founders have it all figured out on day one. Most founders start with a product idea, a vague sense for who might like it, and a hypothesis for what value they can provide. That’s it. If they’re really good, they may have a few customers willing to be design partners so they can figure out who really needs their product, why, and how much they’d pay for it.
But lots of founders we talk to are stuck somewhere in the middle. They have an amazing piece of technology, but no unique insight on their market. When investors hear this, they inevitably jump in and suggest that founders “talk to customers!” And that’s undoubtedly the right thing to do. But I find that advice is just too generic to be helpful. These founders have been talking to customers! That’s not the problem. And I don’t think the issue is that they weren’t listening either. In my experience, the problem is that the founders stopped asking questions. They heard what they wanted to hear and moved on.
My take? With this pithy line, Paul Graham traded brevity for utility, and created a generation of entrepreneurs who are racking up hours on Zoom, but learning very little in return. In other words, talking to customers isn’t enough. It’s how you do it that matters. And for that, my advice is to take a bit of inspiration from Taiichi Ohno, the architect of the Toyota Production System, and his elegantly simple technique for identifying the root cause of a problem called the Five Whys.
You’ve probably come across this before, but if not, the conceit is incredibly straightforward: to find the root cause of a problem, ask why five times in a row. Here’s a famous example (originally quoted here) of Jeff Bezos asking the Five Whys after a safety incident at one of Amazon’s fulfillment centers. An associate hurt his thumb. Why, Bezos asked? “Because his thumb got caught in the conveyor”. Why did his thumb get caught in the conveyor? “Because he was chasing his bag, which was running down the conveyor belt”. After a few more whys, Bezos had his solution. The associate needed a table on which to place his bag.
The conclusion is so simple as to seem silly. No new conveyor belt design. No expanded safety training. Just a table.
But this tracks with the unique market insights I’ve seen unearthed by companies in the Angular portfolio as well. As the founders traverse the whys, the answers get more and more complex until all of a sudden, a surprisingly simple root cause is revealed. But the issue, inevitably, is a Gordian Knot. Simple to understand, but pernicious to solve. The knot tied tighter and tighter due to technical limitations, institutional inertia and coordination challenges. But as a founder, this is the ground truth you need to derive your unique insights on the market and determine how you’ll operationalize those insights to cut through that knot once and for all.
As first-check investors, we don’t expect you to have it all figured out, so don’t worry if you’re still trying to unearth your unique market insights. Reach out. Let’s discuss. We can ask “why” together.
David
FROM THE BLOG
Customer-driven Entrepreneurship
Reframing the critical unlock in early-stage venture.
It’s 3am. Do You Know What Your Third-party API Calls are Doing?
Announcing our investment in Lunar.dev.
Small & Strong Beats Big & Weak
Three startup paradigms in the LLM era.
The End of Entrepreneurship by Autopilot
The unicorn factory has stopped. What are the implications for founders?
EUROPE AND ISRAEL FUNDING NEWS
Spain / SaaS. TravelPerk raised $104M, led by Softbank, to double down on growth and extend its product offerings with artificial intelligence.
Denmark / SaaS. Monta raised €80M, co-led by Energize Capital, Greenpoint Partners and Denmark’s state-backed Export and Investment Fund, to expand their team and the global partner network for their electrification platform.
Israel / Security. Torq raised $50M, led by Insight partners, to continue investing in growth.
Germany / AI Infrastructure. Qdrant raised $28M, led by Spark Capital, to double down on the growth of its eponymous vector database.
UK / SaaS. Morressier raised $16.5M, led by Molten Ventures, to continue building workflow solutions for academic societies and publishers that seek to identify and reduce fraud.
Netherlands / PropTech. Spotr raised €4.5M, led by EDF Pulse Ventures, Volta Ventures and InnovationQuarter, to build their AI-powered property inspection platform.
Germany / Tech-Enabled Services. deeploi raised €3M, led by Cherry Ventures, for its IT-as-a-service platform for SMBs.
UK / IoT. OctaiPipe raised £3M, led by SuperSeed, to continue building and sell its end-to-end Edge AI platform.
Israel / Cybersecurity. Both Snyk, an Accel Partners–backed startup that sells security tools for developers, and Cato Networks, a SoftBank-backed startup that sells network security software, are preparing for IPOs.
WORTH READING
ENTERPRISE/TECH NEWS
Podcast of the year? In this outstanding episode of the BG2Pod podcast, Bill Gurley (Benchmark) and Brad Gerstner (Altimeter) cover all of today’s hottest topics in VC land. It’s a must-listen podcast, but here are five key takeaways: (1) The AI funding cycle is in large part hype and circular revenue flow; (2) open source will win in AI; (3) last round valuation is a stupid hurdle for next round financing; (4) revenue multiples are the most naive way to value a company; and (5) far too many VCs and board members are ZIRPers without the experience or wisdom to help CEOs navigate this moment.
FTC probing the AI ecosystem. The FTC has launched an investigation into anti-competitive practices among the AI giants. “The FTC under Chair Lina Khan has expressed concern about whether dominant technology firms would quickly command the growing field of generative AI, systems that have humanlike abilities to converse, create media, write computer code and more. The FTC, which shares antitrust authority with the Justice Department, said it would use its study to probe the companies’ investments and partnerships and how they affect the competitive landscape for AI.…“Our study will shed light on whether investments and partnerships pursued by dominant companies risk distorting innovation and undermining fair competition,” Khan said.”
Vertical software is as hot as it ever was. We absolutely agree with our good friend Louis Coppey at Point Nine that vertical software remains a very exciting place to invest. In his recent blog post, Louis makes two points. First, he argues that many B2B marketplace companies are better understood as software companies because that is how their value is measured. Second, he argues that vertical software companies often benefit from increased leverage that allows them to grow faster than their ostensibly small TAMs would suggest.
Non-obvious profit margins for AI giants. The Information reported on weak gross margins at Anthropic and OpenAI, two of the leading GenAI platform companies. “New data show that profit margins for such startups may end up lower than for existing enterprise software firms. After paying the costs of customer support and servers to power its AI, Anthropic’s gross margin — gross profit as a percentage of revenue — was between 50% and 55% in December, according to two people with direct knowledge of the figures. That’s far lower than the average gross margin of 77% for cloud software stocks, according to Meritech Capital….Notably, Anthropic’s gross margin doesn’t reflect the server costs of training AI models, which Anthropic includes in its research and development expenses. These costs can add up to as much as $100 million per model, according to Sam Altman, CEO of OpenAI. An Anthropic spokesperson declined to comment….Anthropic’s biggest startup rival, OpenAI, may have even weaker gross margins because it runs a heavily used free tier of its flagship chatbot, ChatGPT.”
HOW TO STARTUP
Raising a seed round in 2024. Crunchbase reported on just how much harder it is to raise a seed round in 2024 than in previous years. “Seed funding to startups has grown into its own asset class over the past decade, with round sizes trending larger, and a bigger pool of investors backing these nascent startups. But in the aftermath of 2021’s venture funding heyday and subsequent pullback, investors say that while seed funding has held up better than other startup investment stages, these very young startups will see lower valuations and must now clear a much higher bar to get backing. More companies raised seed funding above $1 million in 2021. Those companies — which raised during a record-smashing year for venture funding — are saddled with valuations that could be too high for this current market — even at seed. Many of those startups have been forced to cut costs to extend their runways, and face a tougher sales environment….What this all shows is that seed has become an increasingly significant and elongated phase in a company’s early life cycle, where companies are raising multiple million-dollar seed rounds. And as of late, more companies than ever before are wading in the seed pool.”
HOW TO VENTURE
Imploding unicorns and imploding VCs. Jessica Matthews wrote up an outstanding overview of the boom-bust cycle in startup valuations (and venture capital firms). “The lack of funding and dried-up acquisition market played key roles in the demise of Convoy, which was seeking a buyer in its final hours. “We spent over four months exhausting all viable strategic options,” Lewis, the CEO, wrote in his memo to employees. “M&A activity has shrunk substantially and most … logical strategic acquirers of Convoy are also suffering from the freight market collapse.” The shift in the market has led venture firms to radically mark down their investments in their funds. But a lack of IPOs and M&A deals is causing another problem: Venture funds aren’t able to return money to their own investors, the limited partners. That leaves the LPs either overexposed in this high-risk sector — and thus unwilling to put in new money — or without liquid capital to reinvest in new funds. And that breaks another link in the chain of startup capital.”
Seedrs cuts back. European crowd-funding platform Seedrs has trimmed about 15% of its staff and is leaving the Spanish and Swedish markets. In the post-ZIRP environment, it’s not surprising to see crowd-funding platforms under significant pressure.
PORTFOLIO NEWS
DUST Identity has a new partnership with Mad Arts to introduce its on-object security and authentication solution across their exhibits. “Mad Arts is the first museum to feature DUST Identity’s solution, providing an unclonable, digitally linked fingerprint for each one-of-a-kind artwork. This cutting-edge technology, seamlessly integrated into every exhibit, establishes an invisible shield of protection that safeguards the authenticity and value of the artists’ creations while enabling trusted experiences for everyone in the ecosystem, from the artist and suppliers to galleries and collectors.”
LightSolver’s CTO, Chene Tradonsky, shared his quantum hardware predictions for the year ahead. “While the industry waits for quantum to live up to expectations, we find immense potential in a new way of computing, leveraging lasers, We firmly believe that laser-based solutions will emerge as promising and viable infrastructure options in the realm of high-performance computing, proving to be the most scalable, reliable and affordable option for the enterprise.”
Front’s CEO, Mathilde Collin, will sit down with Parker Conrad, the CEO of Rippling, to talk about why transparency around support is so important in an upcoming webinar on February 8th. Register here to join.
