TechCrunch recently posted a video of Paul Graham holding his infamous ‘office hours’ live and onstage. This presented a good opportunity to follow Paul’s logic.
Not coincidentally, Paul’s logic is very similar to what we look for in an investment. While I’m at risk for stating the obvious, let me draw parallels between Paul’s thinking and some of our investment criteria:
Well-defined customer pain point
It’s all-too-easy to fall into the trap of creating technology for technology’s sake. Companies do well when they identify pain points that customers are currently experiencing. (As Steve Blank notes, it’s even better when customers have a pain point and they’ve allocated budget or have tried to fix it themselves.) If you build a “solution in search of a problem”, it can be hard to build the underlying business and revenue models as an afterthought.
Get revenue to show that customers are willing to pay
Getting people to pay not only highlights the viability of the business model but it also validates that a company can support paying customers. As later-stage investors, we look to invest in companies that have at least $500K/quarter in Revenue (and typically $1M+/quarter). On a side note: customers who are not paying real money can be hard to convert to paying customers. Conversely, sometimes increasing price will also increase demand – strange but true!
Segment your customers
As Paul said, “you need a small subset of users much more driven than the average user”. Identify customer segments that have specific needs so that you may target marketing messages to them more effectively. The more you can target customers by their needs and interests, the better.
Whether it’s partnerships for customer acquisition or distribution arrangements, build win-win relationships with companies that can help you succeed. (Keep in mind though that using APIs circumvent some of the need for this.)
In addition to these basic criteria, we take Paul’s thinking to the next level. Here are a few examples of what we do after companies are seeing significant revenues:
Build a formidable sales machine
In addition to having a strong product, it’s important to push the product in the marketplace. To achieve this, build an effective sales team to generate the top-line growth necessary to scaling. (More posts on this here)
Engage influencers and build your brand
To grow fast, it’s absolutely essential to build relationships with influencers—be they channel partners, trade press, social media mavens or other influencers. (See more info here)
Build the company for long-term growth
This is where the divide can often happen: founders used to the ‘startup life’ need to design and build an organization that can scale. This is a non-trivial task—it’s hard to build the people, processes and technology that help a company move up the curve (from $1M to $10M to $100M in revenue). It’s helpful to work with investors who have “been there before”.
Of course, for more info on how to build sales & marketing after the $500K/quarter mark, please see our fantastic Labs site at: https://labs.openviewpartners.com/.