The following post was written by Ofer Brandes, SVP Strategic Effectiveness at Payoneer, during his tenure as CTO at Viola Ventures (2003-2019).
As investors, we want to choose winners. We want to put our money on an excellent team and a superior technology that’s addressing a lucrative market with a unique offering. But how do we know that your team is excellent and whether your technology is indeed superior?
When we first meet you, it’s difficult to tell because we don’t know you well enough and don’t understand your technology deeply enough to feel assured. Sometimes we are tempted to invest because we see the potential, but fear that you might fail.
So we ask questions, many questions. We won’t necessarily invest in your startup if your answers about your technology are good, but we’ll certainly feel uncomfortable investing in it if they’re not.
Here are just a few examples of questions we may ask in order to decide how promising your software is:
What is your technology for? What are you actually doing?
When pitching to investors, some entrepreneurs dive very quickly into describing how they managed to accomplish a cool technological trick or solve a difficult technological challenge. This is often the most interesting part of the discussion because it’s always an “intellectual” pleasure to listen to very clever people talk about genuinely brilliant solutions. But before we hear about the technology, first we want you to explain to us what you’re actually trying to do. After all, it’s difficult to evaluate the solution before we understand why the problem is important to solve in the first place.
- What is the problem that your technology is attempting to solve?
- What is the product or solution you are offering to the market?
- What does the market think of your offering?
- Do you fall within a well-known product category or are you claiming to define a totally new category?
- Who are the customers? Who are the users? They are not always the same people. In many cases (with the exception of consumer apps like games and personal mobile apps), the customers (the people who decide to buy the software and pay for it) are not necessarily the end-users (the people actually using your software). The 2 groups care about different things and we’d like to understand what problems you are solving for each of them, what exciting innovations are you offering to solve them and why these problems or innovations are really important to both groups.
Technological Evaluation: Techno or Logical?
This is a question that I feel very strongly about personally. I prefer to focus on the “logical” (the concept) rather than on the “techno” (its implementation).
Obviously the technical solution must be good: Well-designed, robust, efficient and scalable, plus it’s important to select appropriate technologies and development platforms from the beginning in order to avoid unpleasant consequences later on.
The technical solution should be considered as “Step 2” though. “Step 1” is to understand what, conceptually, you are doing. What is the core of the technology that the engineers are trying to build? What is your approach and what are its advantages and drawback?
The “What” and “Why” should be the first things you clarify about your technology. Only once that’s clear might I also inquire about the “How”.
What is the innovation?
Is it a shiny new algorithm that nobody has ever thought of before, or maybe a collection of insights or heuristics accumulated from domain expertise and many years of experience? Or maybe there is no technological innovation, just a new idea for a cool app that will capture the attention of millions?
Each has its merits. You don’t have to own a patent on an innovative, deep mathematical invention to succeed. But you do have to be realistic and honest about the expectations you’re setting: If the claim is for a fundamental technological innovation, then let’s dive into it and understand what your secret sauce is. And if the innovation is elsewhere, then let’s discuss its components and merits, but don’t make a claim of innovation where there is none.
As investors we really want to understand what makes your startup unique. If it’s not the depth of your technology, that’s OK, as long as it’s clearly stated. But if technology is not the real differentiator of your start-up, then what is? If you can’t answer this convincingly, then your dream of a startup may be over before it even starts.
Is it really difficult to do? Have you already “climbed the mountain”?
Assuming that technology is the core of your competitive edge, how much of a barrier is there to replicate it? “How high is the mountain”?
Even if you have come up with a great innovation that no one has thought of before, if it’s fairly easy to replicate, then you may still succeed, but not as a result of a technological edge.
As investors we want to understand how difficult it is for others to imitate the technology, or maybe achieve equally attractive results in a different way. If the answer is not clear, then we start worrying (it shouldn’t be that hard to explain the uniqueness of your technology if it is indeed truly unique).
If it is indeed difficult to do what you propose (technologically), it means that anyone who wants to attempt it will have “a high mountain to climb”. That’s great for you if you have already climbed the mountain (or at least “ascended” to a significant height) because it gives you a good lead, and a good lead means that you can benefit from launching into the market a lot sooner than any potential competitors. But if you haven’t made significant progress, if you are also still at “the base of the mountain”, then you need to overcome the same barrier, which means that you don’t have an edge over potential competitors who are also beginning from a similar starting point.
Understanding the maturity of your thinking and of your product is essential for us to assess the viability and risk of our investment. We need to know the facts.
Can you convince us that it really works?
I usually take the claims of technical people regarding the results they have achieved with their technology at face value. But since the technology is being developed to solve a problem, I want to understand clearly what you have chosen to measure, why and how. What are your benchmarks for measurement? Are they the right factors to be measuring? Are they being measured the right way? Before we set measurement goals and priorities, let’s understand whether and how they are relevant.
Who are your competitors?
There are many other smart and capable teams in the world, possibly working on a startup idea that’s very similar to yours. Are you familiar with them? Do you know what they are doing? What is their approach? Why do they believe they can win and is their optimism justified?
We tend to be skeptical of the notion that no one else has already thought of an alternative to what you propose. It may become apparent that you are indeed unique, but we want to feel confident that we haven’t reached this conclusion hastily, which is why a competitive analysis is crucial for us to understand the competitive landscape and determine whether your technology or idea has an edge that places your team at a clear advantage.
Who are you?
Getting to know your team is one of the first things we want to do. We’ll want to know that you have the necessary knowledge that’s required for someone in your domain and that you understand the issues at hand. We want to know what relevant past experience you have. We want to hear about your successes and your failures, and what you’ve learned from each.
But knowing your team is also one of the last things we’ll be interested at, because we know that once we’ve completed a full technological discussion, having observed the interaction we’ve had during this discussion, we’ll gain new insights on your team, which in many cases are as important as the information you tell us about yourselves.
For better or worse, while we evaluate your technology, we are also trying to evaluate your competence as a team. Although our impression may sometimes be based on information gained in just a meeting or two, as professional investors we cannot allow ourselves to close our eyes to red flags just because they might be false ones.
Presuming that you’ve been able to convince us that your technology is solid and promising, the next thing you’ll probably want to know is “how quickly can we invest?”, and that’s a fair question. My quick answer would be “Can’t tell” This isn’t a question that can always be answered quickly, because “technology isn’t everything”.
Sometimes your technology or software solutions are just a secondary factor in the decision-making process, and even when it is a major factor, there are other critical considerations that may be raised during the due diligence of your company that will influence our decision on whether to invest in your startup or not. But that’s a subject worthy of its own post.