Product/Market Fit & Competitive Advantage

As an interim CFO, I hear many pitches from early stage growth companies that want to raise capital.

They are looking to peak my interest, to convince me to work with them. They’ve realized they need a strong financial foundation upon which to scale and replicate internationally.

I’ve come to realize that there is a structure – a system – that any startup founder must think through to successfully win over any early stage investor or to convince top talent to join their company.

When I talk to pre-revenue or early stage revenue companies, I keep the conversation focused around 4 topics…

I first want to know what your end goal is. It will be hard to provide you a road map if you have no destination.

Now, I’m not talking about an exit strategy, because just mentioning that will make every investor run away. Venture capitalists tend to prefer home runs, that is returns of 10-100x their original investment. If the founder can already envision a sale of the company then the significant upside to the company, that nobody can yet imagine, won’t materialize.

Instead, I want to know how you plan to grow, how fast and what level of sales you ultimately want to achieve.

Then our discussion will turn to your team.

Typically, in a tech start-up, the technology know-how stays in house. The first 4 people in the team will be the CEO, head of sales/marketing, and 2 developers/coders. (Preferably the developers are located together, but that’s not a deal breaker).

For any other business, the same thinking holds true: 4 people – one focused on strategy, one on sales and marketing, and 1 or 2 on developing the product.

From the beginning, you’ll be searching for product/market fit whilst further designing and developing the product. I will probe further into this area by asking about your sales funnel and the different marketing pillars you’re engaging in both online and offline.

Finally, I will dig into your competitive advantage.

Y-Combinator, a very popular start-up incubator in Silicon Valley, takes these last 2 elements very seriously. Their application for entry into their program focuses significantly on product market fit and competitive advantage. I’ve documented some of the pertinent questions they ask in their application form here:

Product Market Fit:

1. What’s new/different/innovative about what you’re creating?
2. What proof do you have that people need what you’re making?
3. What substitutes do people resort to because your product doesn’t exist yet?

Barriers to Entry/Competitive Advantage:

1. What drove you to pick this idea to develop?
2. What credibility/expert status do you have in this area?
3. What elements of your product are unique/make you stand out from the crowd?
4. What insight do you have that nobody else has?

Now there are many other topics to discuss, such as the financial plan, but if these 4 core elements (vision/end goal, team, product/market fit, competitive advantage) aren’t well thought out, then the founder will need to go back to the beginning and redevelop their business plan.