How to easily explain to a VC what type of startup you are building

Let’s make our lives easier…

As part of my job as VC at Nauta Capital I meet multiple startups every week and one of the first questions that I try to answer for myself when having that first meeting is whether the founder(s) are working on a technical innovation, a commercial innovation, or on an operational play. This crucial piece of information helps me determine how the startup is different from its competitors (true innovation = competitive moat) as well as the key success ingredients and whether they are present. While seemingly simple, you’d be surprised how many founders struggle to clearly articulate their innovation type (and VCs fail to understand)! And while this is useful for me as an investor, it’s 10x more useful for you, the founder, to know the answer to this key question when selling to customers, recruiting, fundraising or when you are defining key strategic priorities for your next 12–18 months.

Here an Easy Startup Innovation Framework to help with that:

Easy Startup Innovation Framework (ESIF)

• Commercial innovation = new business model or customer segment
• Technical innovation = new tech with a degree of technical risk
• Existing -> New = sliding scale relative to current market conditions and state of the art.

Disclaimer: Similar to any other framework, this is a simplification (and it leaves out aspects such as competition and market size completely). But I’ve tried to provide a few directional examples of startups and where they sat in this framework at the time they started out e.g. Cloud Computing was certainly a moonshot when it started but it’s now an “existing” technology and biz model.

Ingredients for Success

Once I directionally determined what type of startup I am dealing with, I can also think more about the key ingredients required to make the startup successful these include:

Product/Tech Innovation

• Technical expertise: due to the novel nature of the tech and more significant development risk I’d like to see a strong (full-time) CTO and a strong dev bench.
• Commercialization skills: the best won’t get sold when you don’t know your customer and business practices, a common stumbling block for technical founders.
• Longer runway: the more the innovation the longer the runway to get to revenues and profits. Especially tech innovators should plan for 1–2 year longer runways and heavily leverage available grants and/or R&D tax breaks.
• Amount of data and or data partnerships: for AI-first startups…

Commercial Innovation

• Domain expertise coupled with radical beliefs: how customer taste / consumption models will change. While it’s possible to be successful without having much domain knowledge, it’s just much harder as an investor to determine whether you are simply following a hunch or you have a clear vision, particularly when you are at early stage and customer traction is still a work in progress.
• Tech management skills: tech is not the driving factor here but needs to be still managed efficiently. Tech teams tend to be smaller or partially outsourced and Sales/Marketing/Ops functions are in the lead.

Operational Play

• Operational excellence: the true differentiator since you are selling to similar customers using similar tech, so you have to be an excellent operator to get to scale.
• Domain expertise and commercialization skills: necessary to achieve operational excellence.

Innovation² / Moonshot:

”Double” innovation combining the best of both worlds to achieve breakout success. Hard to execute and even harder to plan for but can be one of the most fulfilling missions as founders and with the right TAM potentially amongst the Unicorns of the world.

In summary

Being able to clearly articulate what type of innovation your startup is building is very helpful when communicating with investors, customers, (new) employees and should help you define your ingredients for success accordingly. I hope this simple framework helps some founders to showcase their startups vision and ambition more clearly and achieve great results on their journey!

Georg Glatz is Investment Manager at Nauta Capital in London with computer science and AI background.

Nauta Capital is a pan-European VC firm investing in capital-efficient B2B software companies, and some lean consumer plays with offices in London, Barcelona and Munich. While industry agnostic, some areas of interest include cybersecurity, business analytics/performance, dev ops, retail technology, and deep tech companies transforming large industries / developing new solutions to previously untackled problems.