Deconstructing Elon Musk’s dog ate my homework answer for Twitter: More validation will be asked of startups

The writing was on the wall: easy venture money for high-risk, visionary companies is going to dry out. The amount of funding and the number of companies that were able to raise funding in the last couple of years were unprecedented. This had to eventually slow down with venture capitals seeking validated, low-risk investments.

I say that Elon Musk asking for further validation on the Twitter deal around real users is symptom number one of the arrival of that time. Now one can argue till they are blue in the face about what Musk’s true motivations are and if he is using this as an excuse to negotiate, and we’re here for all kinds of healthy analysis [DM me, I have plenty of opinions to share about this].

P.S. I am no analyst but the similarities between those graphs are just hard to unsee.

But, I digress!

What does this really mean for small startup founders?

If Elon Musk, the richest person in the world, while investing $44 billion in a company the size of Twitter is asking questions around actual usage, you can bet so will your probable investors, for a lot, lot less.

What we saw in the last two years is basically this: funding cycles moved faster and got bigger than the product lifecycle and customer traction. Easy availability of funds coincided with a super hot market. The result: investors didn’t ask for as much evidence. Companies were raising 10s or even a $100 million dollars in funding before even getting a semblance of actual customer interest. Because easy money makes it easier for investors to bet on the promise of a vision, however improbable.

Let me be clear here. I am not prophesying doomsday and a cataclysmic recession. But the time of irrational exuberance is past. What one can predict with certainty is this:

Now these things happen. VC funding, debt funding, and the IPO-markets are cyclical. It’s not going to be easy money anymore. But there is still money out there for investments. Smart money always bets on validated data and proof.

So, what can startups do? What should they do?

Customer discovery and lean principles are back in vogue!

At the risk of sounding preachy, take advantage of the benefits that a hot market can afford you while exercising an overabundance of caution on getting the fundamentals right.

Your company’s true value has far more to do with your customers’ lifecycle and usability (which closely ties to your product lifecycle) than your funding cycle. And even among the early stage companies that we are working with, we are witnessing funding, customers, and “fortune” leaning towards those companies that have proof of usage.

Narrow focus on customer problems is back. Don’t go wide.

As you knock on investors’ doors, you will see tightening up of the market, need for plenty of evidence, and a pressure to scale. If you had scaled before you nailed the problem, spent a lot of time building the solution without validating the problem itself, narrowing of the focus will be essential to cross the chasm and jump to the next stage of growth. If not, prepare to validate, validate, validate.

If not valuations and funding, what is the real value of your business?

Customer traction.

It’s not about the vision, or your mission, the size of the funding or the amazing management team you have built. It’s about answering more basic and fundamental questions than determine where in the customer traction cycle your startup is:

• Are there people who are aware of the problem you are solving? Do you have a minimum viable problem?
• Do these people care? Are you able to acquire the initial set without vanity sales gimmicks? Do you have a minimum viable prototype?
• Can you activate customers? Is it useful?
• Is the problem big enough for them to pay for it? Can you get revenue?
• Is the solution sticky enough, of high quality so that these customers don't churn? Can you retain the customers?
• Are your early adopter customers ecstatic with your offering to start sharing your innovation? Are they referring you to new customers? What is your NPS?

And then further down the line, depending on which round you are after, you’ll have to answer deeper questions around monetization, cashflow, break-even point, and profitability.

Can you shift the bell curve left and eliminate waste?

The answers to all these questions lay the pressure firmly on your time-to-market and time-to-value. The emphasis is going to be on your ability to validate the problem and the solution faster and cheaper.

You won’t get $100 million to build the product over three years, and no, you can't build a 4 level management team to get to market. Your effort and time should be spent on narrowing your focus, honing in on the one (maybe two) problems that are critical to your value proposition. You’ll want to remove waste. And, you’ll want to move really fast to reach that critical point where you can show evidence of usability, before your funds run out, before you get disrupted, before… a zillion things.

Which brings us back to Musk… (even if you don’t like him)

Musk saying that the Twitter deal cannot move forward unless there is proof that less than 5% of the accounts are fake/bots shows that the importance of the above-mentioned product and customer lifecycle elements are back with a vengeance.

If the richest man in the world is asking that of one of the largest tech companies in the world — God bless all companies that are looking for Series A, B, C rounds of funding.

Rejuvenation will favor disciplined startups

The good news, and yes there’s one, is that all the companies that were being disciplined about finding problem-solution fit (forget product-market fit for most early startups) and validating to build with the customer at the center of their universe, will still be successful. They will still raise millions and break records.

And these startups and early stage products have one thing in common: they are focussing on testing and customers to validate quickly, find product market fit, and hunkering down to reduce time to customer value instead of build, build, build.

Image and Information Source Credit:

https://pixabay.com/photos/elon-musk-mars-space-exploration-6083103/

https://www.cnn.com/2022/05/17/tech/twitter-elon-musk-timeline/index.html

https://www.google.com/search?q=Testa+stock+price&rlz=1C5CHFA_enUS816US816&oq=Testa+stock+price&aqs=chrome..69i57j0i10i131i433l3j0i10j0i10i131i433j0i10l3j0i10i433.3438j1j4&sourceid=chrome&ie=UTF-8

https://www.investopedia.com/ask/answers/121114/what-difference-between-golden-cross-and-death-cross-pattern.asp