I speak with many investors and entrepreneurs every week. Most investors get in touch because they want advice on how to differentiate. While I love to connect with others in the industry that are investing, I can save us all a lot of time right now… I can not tell you how you’re special. What I can do is talk you through the thought process of how one differentiates. In our business it’s simple…
1) How do you provide unique value that others don’t (ie. what’s your product)?
2) How do you connect with promising startups before they’ve closed a raise (ie. what’s your channel)?
That’s it. Value and Dealflow. Galen and Brian get it. While you can criticize the index approach as much as you want, it’s clear that they do offer value and they see a lot of dealflow.
The big issue I see is that folks often neglect one of these two things. And, more often than not, it’s number 2. There is a parallel here with the startups we are investing in. Every startup has a product strategy and a channel strategy. And the best startups are just as innovative on the channel-side as they are on product.
Let’s consider an example… Were Dropbox and Box the first companies to attempt file storage, sharing and access from the cloud? Of course not. But it’s clear that they were the big winners. While I think they both did a nice job on the product side, it was their channel marketing strategy that really accelerated their growth. Dropbox on the consumer-side, an early pioneer in viral marketing, and Box on the enterprise-side, employing a hub and spoke strategy.
I’ve spoken many times on the program about the innovative water analytics product that I launched. The existing water testing process was a 30 min, 15 step chemistry procedure, requiring expert precision. And we developed a product that allowed an unskilled worker to perform four procedures, in less than 5 minutes with just one step. And while the product is to thank for creating incredible customer excitement, it’s not what got us to $100M of revenue in the first year. It was the channel strategy that led to a fast, furious revenue ramp.
While conducting 500+ customer meetings during development, I learned a great deal about users… and not just what they buy but also how they buy. A customer at one of the largest water municipalities in California casually mentioned that they’d require around 100 units, but their network would need more than a thousand. It turns out that if you look at a map of large urban water treatment facilities, it looks very much like a series of hubs and spokes. The largest facility in the area exports their water to smaller facilities that export their water to the consumer’s tap. And, unbeknownst to me, each of these constituents “follows the leader” so to speak. Whatever processes and products the Hub is using, is then adopted by all the spokes. So, one modest sale to a major hub yielded a waterfall of customers connected to that hub. After this realization, we proceeded to included all the major urban hubs in our voice-of-customer testing. When the customer is a part, or at least feels like they’re a part, of a new, innovative, product creation, they become your top evangelists. Long-before product launch, we seeded the market with an aggressive hub-and-spoke strategy. We put as much effort into an unprecedented channel strategy as we were putting into the product.
Some of the worst products win big because they own the channel to the customer. And some of the best products fall down because they can’t reach the customer. Do you want to invest in startups that are focused on one of the two. Or would you rather invest in startups that are equally innovative on product, as they are on channel? And at the end of the day, we all must look in the mirror. When the best startups are choosing their investors… what do you think they’re looking for?