It’s been almost a year now since my first internship in the VC, this past year has probably been one of the most rewarding in the past 23 years of my life. I have decided to write a little bit about some of the (many many) learnings from the exposure to the brightest minds in the world (aka entrepreneurs).
Don’t sell your tech is my first series on this awesome blog. Being based in the MENA region, I can say with 100% confidence there is a tremendous lack of tech talent, and from the looks of it, it’s not going to get any better anytime soon. This has resulted in an influx of companies that their main defensibility lies outside their tech and it is shocking how many founders try to sell their tech (an outsourced MVP which would take 2-3 10X engineer 6 weeks to replicate). There are a quite a few business models where the main defensibility of a company lies outside their tech. For each of these, I will be dedicating a different post. With no further ado, let’s jump right in: Marketplaces.
Marketplaces are awesome (at least when they work). I think in the past 3-4 years these have had the most amount of success in the region (in terms of the sheer number of companies that raised money beyond SEED). Mumzworld, YallaCompare, PropertyFinder, Dubizzle, Souq, Melltoo, Wadi, Jumia, Careem among tens of others. Marketplaces are easy to spot, startups who acts as a middleman and add value to both parties in the chain are almost always marketplaces.
Here is an example of horrible marketplace pitch:
- Hey we are team Awesome, we have developed a new marketplace for selling dog hats
- We have 100 supplies on board already, no one else sells dog hats so we have first mover advantage
- we have spent $100K since our launch, and are raising 1-2M to spend on marketing
- We have 10-20 orders every day since launch.
- We will also use that money to build an AI recommendation/personalization algorithm/blockchain infrastructure
-10 minutes explaining what AI is or why blockchain will eliminate the trust issues
One of the most common features of a marketplace that makes them a very lucrative business model is network effect: as you add more products/services..users have more choice, they get more value out of using the product and hence use it more. As more people are added on the supply side, the value of your startup increases and the unit economics hopefully will start to make more and more sense…maybe even making the business wait for it profitable 5-7 years down the line. The problem with these kinds of pitches is primarily the founders are focused on all the wrong things. Here is why
- First of all to kickstart a marketplace, buying ads is by far the most horrible way to get started. This is important when you start growing and have a much better sense of your unit economics. But to get started (given the low technical debut needed to enter the market) you need to “creatively” find your customers (some people call that “growth hacking.”) This is mainly what investors refer to as “go to market strategy.” Your go to market strategy usually says a ton about how you develop your product roadmap, the unique insights you have and market understanding that you possess. If your go to market strategy is to throw money at your first problem(early customer acquistion) it’s not a great signal to investors.
- Metrics! While SEED investors are not generally obsessed with metrics, they still want to see them. Why? Because again it says a lot about the founders and their short term vs long term goals. If you spent 10 minutes pitching why blockchain is revolutionary and don’t spend any time highlighting what is the most important metric you are tracking (Cost of acquisition, Lifetime Value, Basket Size, Conversion rates..etc) and how you plan to improve it over the next 18 months, then you are doing something wrong. Metrics define what success is and what failure in the context of your startup. If you don’t know that then what are we doing here?
In other words if you are a two-sided marketplace raising a seed round: don’t sell your tech; sell your network effect (and also make sure you know how to measure it)