PS#089: 10 Ways to Build an Investment Thesis – Customers & Users (Part 3)

​Last week​, we discussed a few strategies centered around incumbents.

Today, we’re going to walk through some of the thesis building strategies that involve the customer and users of these solutions.

When speaking with customers and users, I focus on thinking through/asking the following…

• What are their problems?

• What are their proposed solutions?

• Where do they always have budget?

• What are their new behaviors?

These questions on their own (or together) can help provide insight into potential theses and investment opportunities.

Alright, without further ado, let’s dive in.

Disclaimer: A strong network is a prerequisite.

Quick disclaimer, for these questions and these strategies, you will need a strong, trusted network of customers and users in your target market.

The reason is that there needs to be a level of trust to really get at the truth of these issues. If we don’t have that level of trust, it can be hard to understand how an individual really feels or how they will actually behave in a certain situation. The conversations can end up being performative rather than digging into the heart of the matter.

On the other hand, if you have a trusted network, you can dive into the details of a certain problem and/or solution with much more honesty. You’ll be able to ask these questions with a higher level of confidence around the individual and collective responses.

As I’ve discussed in previous issues, building a strong, trusted network is a foundational part of being a successful venture capitalist. This is just another example.

(1) What are their problems?

A relatively straightforward question to start with here.

What are their problems?

We all have problems in our lives that need to be solved. Some of these problems are currently being solved by those outdated solutions we discussed in the last issue, some are being duct taped together in creative ways, some are too small to be a priority, and others just don’t have any solutions at all.

Our goal with this question is to find the need-to-have problems that will persist over the long-term. We’re looking to build businesses that will typically take 5-10 years to mature (and we’d like them to exist even farther into the future), so we’re making a long-term bet on these issues continuing to be a problem.

It starts with building that list of potential problems. We can then discuss these problems with other customers and users in the market. If we start to see a pattern emerge amongst our network of customers, we may have identified a significant problem (and hopefully the potential for a significant business).

(2) What are the current solutions?

The next step in this process is to understand how these problems are being solved today.

What are these customers and users doing? Are they leveraging outdated software? Are they using painful, manual processes? What’s the status quo?

Understanding the landscape of current solutions can help us see what is and what is not working. We might find that the solutions today are good enough, making them tough to displace. We might find that there really aren’t any solutions today and we should be looking for the right team to pursue this market opportunity. In the latter situation, your customer contacts might even give you a proposed solution that would work well for them (and others in the market).

In any case, it all starts with identifying the problem and mapping out the current landscape of solutions.

One final note – as you map out that set of solutions, it’s important to consider ALL the potential solutions, including direct competitors, legacy solutions, the status quo, alternative solutions, and budgetary competitors. This is something we’ll discuss more in a future issue.

(3) Where do they always have budget?

A customer’s budget will often show you where big businesses can be built.

Where in their business are they always willing to spend money? Where does the company always set aside budget? Where are they even willing to overspend?

In other words, what are their need-to-have (a solution) problems?

We’ve all experienced situations where something sounds like a great idea, but we’re ultimately not willing to spend the time or money to purchase the solution. It happens all the time. We often talk about these types of solutions as nice-to-haves, not need-to-haves.

As investors, we’re looking for the need-to-have problems (and solutions). These problems are often long-term, persistent, and directly impact the business. These are the types of problems we want to be solving (because they can sustain big businesses).

A customer’s budget will show you exactly where their priorities lie.

A quick note – this is a sensitive question. In order to dive into this (at even a high level) and get honest answers, you need to have a level of trust and understanding with the customers in your network. If there is that trust, there’s a lot of great information that can inform your efforts.

(4) What are their new behaviors?

The past few questions focus more so on where things stand today. This last question dives into how things are changing, which can often lead to big opportunities.

Again, starting with a trusted network, we can start to learn what about their job, situation, behaviors, etc. is changing (and potentially causing new problems).

If the relationship is strong enough, you might be able to ask this question directly. However, another way to handle it is by having regular conversations with these customers. If you’re doing this often enough, you’ll be able to spot the changing behaviors and the patterns in their responses.

It all comes back to building a strong, trusting relationship with these customers. If done right, it can lead to a wealth of information.

Those are some of the strategies that I leverage when speaking with users and customers in my thesis-building efforts. Each of these questions can be a useful starting point, but together, they create a fulsome picture of the problems, solutions, and potential venture opportunities.

In the next issue, we’ll discuss how changes in the market can create venture-backable opportunities.