Feel the Pain

Part 1 of Show Your Working: Understanding our DD Process

We all know that venture capital can be a bit of a black box. From opaque processes to complex deal structures to the alphabet soup of acronyms, to, well, our personalities, it is no secret that dealing with investors can be wildly frustrating. So in an effort to lift the veil, we are publishing a multi-part series on our diligence process. Over the course of the series, we will cover customer pain, team, product, competitive positioning, the nuts and bolts, and the overall market. We hope that this will make things easier for founders, help them understand our decision-making, and be better prepared for their own ride on the merry-go-round that is taking investment dollars from a VC.

What is pain?

For the first piece in our series, we are talking about customer pain. Customers are in pain when they are experiencing a persistent, bothersome problem that prevents them from doing their job or living their life. ‘Good’ pain points are making someone’s life truly suck. ‘Great’ pain points are making a large group of people’s lives suck. Even better if those folks talk to each other and are experiencing pain so acutely that they would pay for an imperfect solution to solve it today. Slight discomfort or vague interest do not suffice - we are talking about the kind of pain that needs a painkiller, not a vitamin.

Why is it so important?

Pain is a powerful motivator. If present, pain radically increases the likelihood that a customer will do something different. Human (customer) inertia is your biggest enemy, and pain is the best leading indicator that they will adjust their behavior if you give them a solution to it. When you are building a business, customer pain should be your best friend, and understanding a specific problem and remaining laser-focused on solving sequential pain as you grow is vital - it should inform your product plan, your go-to-market strategy, and just about everything else you do. Pain is fundamental to great company building, so we devote two sections in our diligence memo to this theme. In our assessment process, we are looking for founders who know this deeply - it tells us that you understand how markets are created, what it takes to keep customers coming back, and that you won’t get distracted by shiny (but unnecessary) objects.?

What does it actually look like?

There are so many great examples of companies going after customer pain in water. Imagine being a property manager knowing that you're sitting on a time bomb - that it’s not if but when you're going to have a $1.4m insurance claim for damage caused by a water leak (the average claim size for commercial buildings in the US), with all the admin and clean-up and nightmare that that entails. And that you don't know where it's going to start, and you sure as hell don't know when. That is a major issue, and multiply that by the number of property managers globally and you have an even bigger issue. Matt and the team at LAIIER understand this pain deeply, and are addressing it with smart printed sensors that alert building managers right when a leak starts, allowing them to pinpoint the problem and address it before it causes damage. Another way to think about pain is in terms of time and resources. Say you are on the team at a small utility, spending hours combing through piles of paper each month, trying to manage complex operational and maintenance workflows with a decades-old system. Your business can’t afford one of the new, larger digital solutions, leaving you struggling to know what is going on, bouncing from emergency to emergency, and constantly terrified that your experienced operators are going to leave because they're already ten years past retirement age. Ziptility is solving this with an asset management platform for small and medium-sized utilities that allows teams to move away from inefficient and slow paper-based systems and move to a proactive vs. reactive management model, encoding the expertise of the seasoned operators in software. These are the kinds of pain points that are just crying out for a solution.

How do we (and, more importantly, you) know?

Another important part of the diligence process for us is understanding how a founder actually discovered the pain. There is nothing quite like seeing the anger and frustration in the eyes of an engineer who has bumped up against the same inefficiency for years. People who have experienced a pain point personally often can’t build a bad solution to the problem if they tried. They just know the pitfalls and costs of getting it wrong all too well. John at Daupler is a great example of this - he lived his pain point for over a decade, seeing the inefficiencies and failures in existing processes for maintenance and customer communications. Now, Daupler is providing an extremely sticky solution for utilities to manage responses to operational issues in their network and optimize responses. But founders can also discover a pain point through a ton of hard work - speaking to 200, maybe 300 customers until they understand the problem inside out and back to front. The important thing is making sure the space between your perception of the reality around the pain point and the actual reality of the pain point for the customer is as close to zero as possible.

So you fix it? So what?

To take things one step further, we also assess the downstream impact of solving the problem on a customer base. Is this a life-changing intervention that unlocks value on multiple levels? This is where the true value proposition lies - the importance of your solution rests on what it enables your customers to do, the knock-on effect of delivering them something great. This is central to the business of a company such as Floodbase. By providing high-accuracy flood mapping and assessments, they are enabling insurers to build more reliable businesses with fewer or at least more predictable losses, and allowing them to underwrite wider portfolios more responsibly, thus leading to more growth. The same is true of NLine Energy. By capturing wasted energy from commercial and industrial boilers, they allow the owners of these assets to generate a new revenue stream from the energy, help them lower their carbon footprint, and tell a great sustainability story. The downstream impact of both of these interventions on customers is massive, and an important part of why we invested.? Companies are always asking people to do things differently, so the ‘so what’ has to be something so valuable (think big bucks) and mind-bogglingly brilliant that customers would be foolish not to jump on board.

What happens if it's not there, or not painful enough?

We don’t want to put anyone on blast, but there are plenty of ‘vitamin’ companies out there. Maybe they are addressing a perceived need, something you might assume is painful from the outside, or their solution is just a nice-to-have, a product adding value but not enough to tip the scale. If customers’ lives aren’t significantly easier/better/happier as a direct result of your solution, then you either don’t have a good enough hammer or you don’t have a big enough nail to hit. It’s blindingly obvious when a founder is too focused on the hammer - refining it, perfecting it. What matters is the size of the thing you need to hit. The best of founders make sure they understand everything there is to know about the nail before they even pick up the hammer. But when they do, it’s often a singular powerful one and done.

What next?

Great companies are built on fixing intense customer pain. Great founders have frightening levels of focus on their pain point. And the very best of them understand that it is the downstream impacts of fixing that pain that form your value proposition as a business. That is why we spend so long looking at a pain point from different angles during our diligence, and why? a founder should be able to explain it from every angle during that process. It is just about the most important thing to us at BIV. You gotta feel that pain.

If you are someone building a solution designed around deep customer pain, reach out to us, and if you are looking for more guidance on what we look for in a company, stay tuned for the next installment in our blog series!?

For more on why deep pain leads to great products, check out BIV Partner Christine Boyle’s musings on the subject here.