Startup Pitching: what really matters

- This article was originally published by myself in the colum Up! on www.inside-it.ch in June '17 -

Switzerland / Silicon Valley, in June 2017

A good startup pitch is easily distinguished from a bad one. In an age in which more and more managers leave their neckties at home and seek inspiration from the "young savages", it is important to know what to look for in startups. It's about "Simplicity" - five simple questions that need to be answered. Startups already exemplify this simplicity principle with the 'Minimum Viable Product' approach. Use these questions to determine whether a collaboration or an investment is worthwhile:

Question 1: "Does the problem actually exist?"

Many startups already fail this first question. Young entrepreneurs develop a top solution to a non-existent problem. In other words, there is no need for the offered solution.

In his book 'Disruptive Innovation', Harvard professor Clayton Christensen gets to the heart of this and poses the question: "What is the job to be done?" Three quarters of all new products do not make money because there is no correlation between the product and the actual customer problem. It is essential to assume the customer perspective, because service characteristics and attributes are only relevant from the view of the supplier. The same is true for customer segmentations. This first question will lead you to a better understanding of problem:

• Which improvements or facilitations are achieved by the solution?
• What is the statement, termed "catch-phrase", that sticks with you after the pitch?

Customers will always be willing to pay high prices for new products and services that answer these questions. Nothing less than absolute focus on the customer successfully solves truly existent problems.

Question 2: "How is the startup better than the others?"

Oftentimes, other providers are already offering a solution to the described problem. These may be established companies as well as other start-ups. Therefore, the startup you are looking into needs to have convincing factors of differentiation, such as a technological breakthrough or a new and unique combination of known technologies. Perhaps they are closing a gap in the value chain or already have well-known customers at their disposal, who will open doors for them globally.

Young entrepreneurs, who step onto the stage announcing that they are the market's new UBER, AirBnB or Netflix, can not be taken seriously, because said companies are unique. The chance of success is tiny. Copying one-off successful business models is difficult and in most cases only leads to success if the model is applied in a new industry using similar factors.

Instead, the second question is much rater all about the period of differentiating factors. Startups that only differ in terms of a single factor (e.g. technology advancement) are themselves easier targets for copying. Therefore, only a combined appearance of multiple differentiating factors is truly interesting. Consequently, the combination of e.g. blockchain and a novel business model is far more difficult to copy. If you examine the second question closer, you will find out how knowledgeable the young entrepreneur really is in the market and whether he has studied the competitors. Furthermore, the matter of "IP rights" (Intellectual Property Rights) absolutely needs to be questioned - otherwise the seemingly unique differentiation factor is sure to disappear in no time. Every good startup idea gets copied within nine months.

Question 3: "How scalable is the solution?"

This question is one of the most important ingredients of the "Secret Sauce":

The mere fact that a food delivery start-up, for example, is successful in a city's district and increases its revenue does not mean that it will work in other cities or even in other countries.

Here, the disadvantages of startup investing become apparent. Not all business models keep what they promise. Cultural differences are often greater than assumed and technologies will be copied at some point. Accordingly, investors are betting on various start-ups with the objective of at least three out of a hundred yielding success. Accordingly, those three must rapidly achieve such a significant enterprise value (valuation), that the investment also co-finances the remaining 97. In the event of a startup actually joining the 'Unicorn Club' (=Valuation> 1 billion US $), the investor can in fact treat himself to riskier investments. His mere contribution increases a startup's survival chances, for other investors usually also engage themselves.

The remaining 97 startups do not reach the set goals and will either be taken over or disappear.

As part of their initial expansion outside of their own region, Swiss startups often plan to enter the market in the rest of Switzerland or in South-Germany. US startups, on the other hand, focus their expansion plans on other continents from the outset. Given such ambitions, you begin viewing the problem from a different perspective early on. Swiss startups also want to expand into other countries. Yet, their focus is far less resolute. Thus, the scalability of the business model is the most crucial question when it comes to working with startups. As a result, an investor only goes for companies that could yield a return several times higher than the contribution. The successful ones must co-finance the unsuccessful ones.

Question 4: "Who is behind the startup?"

The second question has already revealed how familiar the founding team is with the market and the competitors. Now you must examine the "background" of the founders. What did they study? At which companies have they gained experience? What has life taught them? The mentors, the board of directors and prior investors are of equal importance. Are you struck by famous names who might possibly guarantee the success of a startup? A startup in the area of medtech should also have people on board, who have profound experience in the medical sector. Also take into consideration how experienced the founders are. Is this their first startup or have they already built up several companies? Value unsuccessful startups on part of the founders as a strong, positive experience, because every failed company makes an entrepreneur grow wiser and helps him learn from his mistakes. Such entrepreneurs have not failed, but have grown richer in terms of a strong learning experience. In our circles, this attitude practically constitutes a cultural change. But if you look at it that way, you can recognize great opportunities!

Question 5: "What's your ask?"

The pitch is concluded: The startup has a convincing answer to all questions. But if the founders leave the stage now, they miss their chance to make demands:

• What do they need in order to grow?
• Do they require employees with specific knowledge
• Are they looking to widen their customer base?
• Do they need access to new industries?
• Access to other countries?

Because: Not all startups merely need capital. Too much capital can actually kill a startup! The founders could lose focus. They might for example expand too rapidly without knowing the market or rent office spaces that they can't really afford. That is why every successful pitch has to formulate what exactly the investors and partners need to master the next phase successfully.

Conclusion:

So, next time you meet a newcomer or take part in a startup pitching, make sure to ask these five questions. If all five are answered in a convincing manner, a cooperation could in fact be worth your while!