The Business Trinity
Each startup is a unique beast. Until it “cracks the code”, it’s just a representation of a Founder’s vision embodied in a business plan.
And a typical VC Investor will review hundreds (maybe thousands) of these unique pitches every year. Each VC has their own underwriting process, but it’s not as formulaic as one would expect given the volume of work moving through the machine. Because of the unique nature of each startup, company specific underwriting questions need to be answered for any given VC to build conviction around what the Founder believes can be built.
But there are many levels of detail in an underwriting process, and for most VCs the first step is “triage” which helps them determine whether they want to “lean in” or “lean out”. I’ve written about the five “statements” that early-stage Founders typically make in their pitches (problem statement, solution statement, go-to-market-motion statement, team statement and financial statement), and I often use this framework as a guidepost for diligence. What I’ve found is that the most interesting startups are those that can articulate amazing answers to a specific trinity of questions at the intersection of these “statements”:
Product: Does the product seamlessly solve a profoundly painful problem through a process that’s intuitive and requires little/no guidance?
Pricing: Is there enough revenue to generate attractive returns while simultaneously seen as a bargain by the target audience?
Channel: Is there a channel of distribution that densely contains the target audience and through which awareness can be built at an extremely low cost?
These might seem like obvious criteria to an outsider, but it’s sad to say that only a fraction of a fraction of startups can satisfy the business trinity.
To call out three specifics that help explain the “why” behind the questions:
1) If a channel is chock full of prospective customers then the dollars that are put into the channel to build awareness educate the right audience.
The result: A high awareness/marketing dollar ratio
2) If a prospective customer is experiencing a painful problem they’re motivated to solve it. There’s no such thing as inertia when it comes to pain so more times than not a prospective customer is thrilled when a solution is presented.
The result: A high consideration/awareness ratio
3) If a prospective customer thinks of the solution as a bargain then pricing no longer becomes a barrier to the purchase decision.
The result: A high adoption/consideration ratio
These ratios are at the heart of efficiency and pricing power. And it’s almost a thing of magic when all the business trinity ratios are “exceptional”. Growth is bountiful, happy customers come naturally and operating margins are extremely healthy. Product, pricing and channel is the business trinity at work. Check, check and check!
And while there are many great startups in the making that can’t satisfy the business trinity out of the gate (or ever), it is a good framework for identifying startups that have a real fighting chance of success.
