I’ve been investing in early stage startups for 12 years as an angel investor and VC (through Highline Beta). I’ve learned a lot and continue to learn. Investing is an art & science. It turns out you can get better at both.
Recently I participated in a mentor matching program for NEXT Canada. You have 10-minute conversations with each startup, after which you pick the top 3-5 that you’re interested in mentoring. Ten minutes is very short, but I realized my rubric for assessing mentorship opportunities is fairly similar to how I evaluate investment opportunities, which is also similar to how we evaluate opportunities through the Highline Beta venture studio.
Note: When I say “early stage startup” I mean a startup at the idea stage, at the MVP build stage (but not yet launched) or at the MVP launch stage (just went live).
Desirability > Viability > Feasibility
DVF is a framework for identifying and assessing uncertainty. It’s a great way of quickly evaluating new startup ideas or opportunities. The three overarching questions are:
Do people want it? (Desirability)
Can we build a good business? (Viability)
Can we deliver it? (Feasibility)
Simple, right? 🤣
If an early stage investor focuses on Viability first, it’s a bad sign. Usually this means they’re obsessed with Market Size, which is a waste of time. At an early stage you barely know what market you’re in, so why focus on it?
Focusing on Feasibility first is also pointless, although in deep/hard-tech this shifts a bit. You can’t promise flying cars with zero ability to deliver. My experience is not in deep/hard-tech so I don’t jump to feasibility right away; although I’ve done a lot of work and investing in regulated markets, so it’s still something I look at.
Every conversation with an early stage founder should start with desirability. When you dig into desirability you also get a sense of the founders themselves—they’re motivations, how they think and how they prioritize what they should be doing. This starts to blend the science (evaluating the opportunity) and art (evaluating the founder) in important ways,
The Core Desirability Questions
Here are the key desirability-related questions that I always ask:
1. What problem are you solving?
Founders need to clearly articulate the problem they’re solving. Often this is “functional” (i.e. “So-and-so wants to do X better.”) I have no issue with functional problems, but they’re usually not enough to build a great company; you also need to understand the underlying social and emotional issues surrounding the problem.
Little problems don’t typically lead to big businesses. If you want to build something big, you need to find really painful problems. Founders need to understand the problem very deeply and be able to explain why it’s so painful.
Note: Not everyone is trying to build a giant, venture-scalable business and that’s OK. But you still need to find a real problem to solve, even if it’s not insanely painful or felt by a huge group of people.
3. How do you know it’s a problem?
A lot of people talk about Founder-Market Fit, but peel that back and what you’re really looking for is Founder-Problem Fit. The classic phrase, “Fall in love with the problem, not the solution” applies perfectly.
In addition, I expect founders to have done their homework on the problem space and market. They should understand what’s going on in the market, competitive forces, incumbent players, key trends, etc.
Understanding a problem superficially isn’t enough. You have to dig. This comes from interviewing potential users/customers and subject matter experts. Some founders will have deep domain experience. This can be a valuable asset (“I know what’s going on and where the bodies are buried”), but also create a bias (“I know everything about the market and don’t have to check my beliefs.”)
Be specific! At a very early stage this is often vague, which isn’t the end of the world if founders recognize they have to dig further and be more precise.
Generally, the narrower you go on the ICP (Ideal Client Profile) the better. Specificity at this stage is awesome because it has a huge impact on what you build (feasibility) and how you reach the market (viability). It gives you the potential of having a competitive advantage against others because you can build the exact right solution for a specific, painful problem felt by a narrowly defined group.
Recommendation: If you’re building a B2B business figure out the people you’re selling to and the people using the product (they may be the same or different). The people are more important than the business type or size.
Startup: “We sell to 200-500 person organizations.”
Me: “OK…but what industry or vertical?”
Startup: “We’re focused on regulated markets.”
Me: “OK…but who do you sell to exactly? Businesses are just groups of people, and each of those people has their own problems, motivations, social & emotional influences, etc.?”
Startup: “Um…um…”
😵
5. What are people doing today to solve the problem?
If a problem is painful enough, people are already trying to solve it, even if their solutions are hacks, slow, ineffective, etc. If a problem is a nuisance but not that painful, people may tolerate and live with it, which will make convincing them to pay for a solution tougher.
The other big issue is solutions that are “good enough.” A lot of founders dismiss “good enough” incumbents. They believe their new “cool tool” (usually based on user experience, flexibility or AI) can win. Maybe it can, but often it doesn’t because the “good enough” solutions are incredibly entrenched, and while users will admit they’re not amazing, the switching cost is too high. Founders should not be naive that the “better solution” always wins—it doesn’t. Further, your definition of “better” may be different from your users/customers.
Recommendation: Don’t forget that solutions are never used in isolation of other things. Your solution is part of a bigger customer journey. Often startups start as point solutions (which is fine!) but then forget that their solution has to be used in a long string of other processes, experiences and products. You need to understand your user’s full customer journey, specifically what they’re doing before they might use your product and what they’ll do after. This will help you figure out how to properly insert your solution into the journey, and give you hints on how you might expand.
6. What’s your core value proposition?
Better, faster, cheaper. More fun. Cooler UX. Automation through AI. Etc.
Value propositions are tricky. You need something that truly resonates with the target customer and is then realized through the product. Value propositions are the culmination of understanding the problem + solution.
What actually makes your solution better than the alternatives? How do you know? How confident are you? These are all good questions to determine how much “homework” founders have done.
In a B2B context the top two value propositions are make money and save money. But everyone says they’ll help with that, so how do you stand out? Most early stage startups focus on a functional value proposition (i.e. “We help you do X better.”) and hopefully they can show this quickly, and then connect that functional improvement in customers’ minds to the higher order / bigger value proposition (make money, save money).
7. Why are you doing this?
“Of all the things you could be doing with your life, why have you picked this?” I ask this question all the time. It’s incredibly revealing. You learn a lot about founders’ motivations and commitment. This is one of those questions that gives you a sense of whether or not founders have the “It Factor”—that nebulous, hard-to-quantify thing that makes them a real founder (partially defined as grit & perseverance, but it’s more than that.) There are personality measurement tools that help with these assessments (I’ve done them a few times). It’s not something I use when making an investment or deciding to work with a founder through our venture studio (although I know some that do it). Perhaps the “It Factor” isn’t as mysterious as I make it out to be, but I still believe it’s more art than science.
The Core Viability Questions
Viability focuses on the economic potential of a business.
Can it make money? Can it be profitable? Etc. But before you start thinking about scale and all the money you’re going to make, you need to figure out if you can reach (and keep) any customers, starting with early adopters and then shifting to late adopters.
8. Do you have any traction yet?
Traction trumps almost everything. At an early stage, even before you have an MVP, you can generate traction (although it’s not completely real):
B2C: Waitlists & sign-ups. These aren’t the same as actual users (i.e. active users or buyers) but it’s something. It’s an indication that you were able to present a value proposition to a group of people and generate some engagement.
B2B: Letters of Intent. An LOI is a non-legally binding agreement to buy the product once you’ve built it. Not every customer will convert when you launch, but LOIs still matter. They mean you were able to get out there and hustle your way into customers’ lives (good sign of having the “It Factor” as a founder), test pricing (LOIs should have a price on them) and solidify your ICP.
Once you have a product, you need to move as quickly as possible to secure early adopters. In a B2B context these could be design partners / pilot customers (ideally paying, but perhaps at a discount and very committed to providing active feedback).
Founders often ask me for benchmarks on early traction, but it’s tough. There’s a lot of variability between companies. For example, B2B targeting small businesses/prosumers is very different from B2B targeting enterprise. Here are rough numbers I often use:
B2C pre-launch: 100-200 waitlist signups
B2C at launch (or shortly thereafter): ~25-50 users (actively using the product, may not be paying; growing weekly at a good clip)
B2B pre-launch: 3-10 LOIs (with just as many in the pipeline)
B2B at launch (or shortly thereafter): 5-10 pilot customers/design partners (ideally paying, with an equal number in the pipeline)
Marketplaces: I need to see, at least, a few transactions. Transactions are a sign that the parties on both sides of the marketplace found value, and you can see if this drives more engagement / transactions after.
Here are a few other answers from investors:
9. How are you going to reach customers?
Most founders I speak with understand they need to do problem validation through customer discovery/research before building anything. But they often still have an “if we build it they will come” mentality. The momentum around PLG (Product-Led Growth) is partially to blame—founders believe if they build a “great product” it’ll do all the work for them. It’s scary how many assumptions are baked into that.
Customer acquisition is not only extremely difficult it can be very expensive. A significant percentage of the capital that many startups raise goes to paid acquisition. Early on I’m not as focused on the cost to value ratio (think: Customer Lifetime Value (CLV) vs. Cost of Acquisition (CAC); Return on Ad Spend (ROAS); or similar metrics) because this can be optimized over time. But the reality is the capital you have isn’t unlimited and it can disappear quickly.
At the early stages it’s unreasonable to assume the startup has a repeatable, scalable customer acquisition strategy. The entire plan might be, “I’m going to cold call 500 people that I think are the right fit, see what happens and iterate from there.” That’s totally fine. In fact, I prefer the most direct approach to user/customer acquisition as possible at the early stage.
Bottom line: You need a plan. A plan suggests that (a) you have a good idea of the ICP (although you’ll iterate and test it); and (b) you’re willing to hustle to acquire customers and not rely on the product to do all the work or for people to magically show up.
Yes, you need a good product that solves a problem and creates value. But truth be told, customer acquisition is the business.
10. What’s the business model? How will you make money and what will you charge?
At an early stage, I’m not expecting founders to have proof that their business model works. Maybe they’re charging out of the gate, but a lot of startups delay monetization, which is fine.
How founders are thinking about their business model is important.
Pricing is always an interesting conversation. Early stage founders often charge much less than the competition, hoping it differentiates them (but also because they’re nervous about charging higher amounts). A low price is a tricky thing to anchor your differentiation on because you may forever be known as “the cheap option.” In my experience, early stage startups undercharge significantly.
Your business model is actually much more than what you charge and how. It’s everything that drives the business to success. Some founders understand the interconnectedness of their business and the levers they can pull to test / improve things, and others don’t. Digging into this with a founder is revealing, it helps me understand how they think.
Feasibility is all about whether something can be built (or not). There are the technical aspects, and other potential issues, including regulatory, compliance and legal.
I’m going to extend the definition of “feasibility” too, because I like to understand the product itself (the core features / MVP, how it will work, etc.) I don’t start by digging into the product, but I think it’s important. What a founder is building, why they’re building certain features and how they think about product are very revealing.
11. How will (or do) people use your product? What’s the core use case?
Startups usually start with “small” products. They have minimum functionality but have to still be valuable. It’s the challenge of defining the right MVP.
One way to get this right is to focus almost entirely on the core use case—what sits at the “heart of your product.” Most great products didn’t start by doing a lot, they did one or a few things really well, got you hooked and kept you engaged (all the while adding more features to hopefully expand the use cases, increase pricing and keep you active).
At the heart of your product is an atomic unit of engagement, the one thing that everything else surrounds and engages with.
At the heart of Asana you have projects.
At the heart of Notion you have pages.
At the heart of Airtable you have bases (basically tables/spreadsheets)
When a founder can’t articulate the core use case (or what’s at the heart of their product) I’m always skeptical. It’s often a sign that they don’t understand the problem well enough, or they don’t have great product experience / product instincts and will build too much and/or the wrong thing.
12. How frequently do you believe people need to use the product to get value?
When a product is launched most of the focus is on usage. If there’s little to no usage it’s tough to get excited. If the product has a lot of usage, you dig in.
I’m curious how founders think about usage. Are they building a daily use app? Weekly use? Monthly use? What frequency do they consider “good usage” and why? Sometimes this is obvious, but in other cases it’s not. And there are many products that are cyclical, which makes it harder to figure out if the usage is at a good level.
Usage usually means that users are getting value. And that’s what you’re trying to figure out early on. Not all usage is created equal though; in an age of AI and automation, products are taking away usage as a value proposition. But generally, if your product is getting usage it’s a good thing.
When speaking to founders pre-launch I always ask, “What frequency of usage are you expecting from users? How often would you like to see them use the product? Why?” This gives me good insight into founders’ understanding of the problem they’re going after and their confidence in the solution to solve that problem.
Frequency of use impacts the business model. It’s tough to charge monthly for a product that gets used a few times per year at best. The product features and how often they’re used “bubbles up” to your ability to charge money for the value you’re creating—what someone does in the product is directly tied to their likelihood to pay (and determine if you have a viable business). All the business model planning in the world is moot if you can’t get the right usage (i.e. solve a real problem).
There’s a lot of debate about the term MVP. Some have abandoned it. Others have morphed it into other things (SLC = Simple, Lovable, Complete; RAT = Riskiest Assumption Test; MLP = Minimum Lovable Product; etc.
13. Have users invited others to your product?
Not all products are designed to be viral, which is totally fine, but if you want to win, you’ll need users/customers helping you acquire others.
Are your early users/customers willing to refer people they know? If not, you’re in trouble.
Are your early users/customers (assuming they’re able) inviting others into your product? Do the invited users activate and become active (i.e. become “good users”)? If not, you’re in trouble.
Even before launching, you can see if users/customers are willing to give up some of their social capital for you. Waitlist users are often encouraged to invite others to get higher up the waitlist (that’s a good sign!) You can ask customers that sign LOIs if they know others. Etc.
14. Are there any legal, regulatory or compliance hurdles you have to jump over?
It’s silly to pretend these issues don’t exist. While early stage startups often live in a “gray zone” they can’t stay there forever. Eventually regulators come knocking. Or legal / compliance issues rear their ugly heads.
At an early stage I’m less concerned about how these will get managed, and more interested in whether or not the founders recognize the issues exist. If a founder is oblivious to future dealbreakers or pretends those issues don’t exist it’s a significant red flag.
Two Additional Questions I Always Ask
There are two other key questions that I like to ask, which could play a role in desirability, viability and/or feasibility:
15. What do you know that others don’t?
Peter Thiel believes there’s always a secret at the core of every successful business. The best companies aren’t started from a level playing field. Winning founders have a “secret” they can leverage. They see the market differently. They have an insight that others were ignoring. Etc.
If you’re trying to solve a “universal truth” you’ll fail. A universal truth is something we all know (or believe) to be true. It gives a large group of people a superficial understanding of something, but not enough for anyone to start a great company.
Along with “secret knowledge” you may have assets that others don’t, which give you a competitive advantage. Most early stage startups don’t have an unfair advantage (I like Ash Maurya’s definition: “Unfair advantages are competitive advantages but with the added properties of exclusivity and defensibility — which makes them unfair.”) but they can have a competitive one.
16. What are your riskiest assumptions and how are you going to test them?
Your riskiest assumption is simple: it’s the one that kills your business if you get it wrong. Founders that are brutally honest with themselves will know which assumption has to be tested first. Unfortunately a lot of founders allow their reality distortion fields to get so strong, they ignore the riskiest stuff and focus on superficial issues that won’t really move the needle.
Asking this question helps me understand:
How rigorous founders are in terms of experimentation & learning
How well founders understand their business and its risks
How founders think about problem solving
That’s a Lot of Questions!
In the end, most of these questions are designed to evaluate the founders:
Do they have what it takes?
Are they approaching things in the right way?
No one has it all figured out at an early stage (or frankly, at any stage!) so founders shouldn’t assume they need “perfect answers.” Be honest about what you know and what you don’t know (that’s where mentors & quality investors can help!) Don’t bullshit your way through answering these questions, investors see hundreds or thousands of pitches per year, they have pretty good bullshit meters.
Hopefully you don’t take these questions as an indictment of your skills or abilities (although I’ve met a number of founders that get insulted the more I dig). I’m not trying to be a jerk or point out flaws. My goal is to help, share my experience and give insight into things I’ve done (good and bad!) and what I’ve seen work or fail. Good luck!
Thank you for reading! I’m looking for input from you. What topics would you like me to cover? What questions do you have for me? Send me a message:
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Excellent read!
This is such a fantastic read for new angels