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When Founders and Investors Unite

When Founders and Investors Unite

The Potential Energy of Pattern Recognition

Matthew Kee
November 2nd, 2024

If you’re new to this newsletter, click here to access the rest of my newsletter articles such as the “Why We Passed on this Startup” series, reflections on investing, and tactics on winning in the market. Now, onto today’s post!

✅ When an investor’s pattern recognition is combined with the founding team’s experience, market insights, and skill, it can transform two isolated voices into what the market experiences as four part harmony. ✅

I often say that in my own startup journey, I made “a thousand mistakes and a couple good decisions.” In startups, success is sometimes more about not driving into the ditch rather than staying on the road.

The high velocity of inputs from hundreds or thousands of startups across diverse industries, business models, go-to-market strategies, market dynamics, and other variables develops an investor’s pattern recognition.

Pattern recognition allows the investor to extrapolate trends and patterns of what variables the startup might want to experiment with. Just two simple examples of pattern recognition could be:

The startups with this business model with X go-to-market strategy, tend to have a harder time acquiring customers that startups with the same business model and Y go-to-market strategy.
A certain market’s dynamics has a certain level of tension between the market actors, and so investors may draw conclusions about the optimal business model for given market.
There are endless examples of pattern recognition in the wild.

In the way that my mind experiences pattern recognition, I am able to hold in tension the variables of the startup that I think are on the right track, isolate the ones that I see as sub-optimal, and mentally swap out different variables to replace what is sub-optimal, and iterate on those possibilities.

✅ Founders miss a huge opportunity when they don’t tap into an investor’s pattern recognition more often. ✅

Pattern Recognition from This Past Week

Just this past week, I met with a founder friend who wanted to get my feedback on the current questions he was facing in his startup.

This founder’s main question was to figure out out where the startup should play in the future. The founder laid out that one option is to become a certain type of platform that is known in a particular industry. I wasn’t familiar with the platform category, so I asked more questions.

It turns out that the market views the startup’s competitors as being associated with a certain platform category. So, the founder wondered if they needed to go that direction too and become a tech platform.

My pattern recognition didn’t like the idea of being lumped into a same category as the competition. My investor experience with hundreds of other startups, as well as books that I have defined this thinking such as Play Bigger, told me that if this startup were to lump itself in the same category, the market would see little differentiation between platforms.

Thus, I encouraged, “Forget the category. You don’t want to be defined as just one of the others, but instead want to stand alone. You want the market to see you as being in a category of one.”

We then moved to the topic of what makes the startup unique from a business model and product standpoint.

The founder said that all of these other competitors sell on enterprise level deals - $75,000+ in ARR - but their sales cycle is a draconian nine months long. This founder’s startup was closing deals in one call, a demo, and then a signed contract in a few weeks for around $15,000 ARR.

Again, my pattern recognition kicked in. In the early days, from similar stage startups that I’ve encountered, it’s much more valuable to have a startup that can acquire customers in weeks in smaller chunks of revenue with little touch than it is to have a high average contract value with nine month sales cycle with a very high touch process.

We lastly moved to who the audience is for the startup’s product. The founder noted that this startup’s product was very simple. Very quick to implement. In fact, IT doesn’t need to get involved, and the actual user of the product is the one who does the purchasing. That meant that the sales cycle is measured in weeks, not in months like it’s competition.

Again, my pattern recognition kicked in. I asked who the competitors’ audience was. My pattern recognition had a hunch, and my hunch was correct. Right on the website of the competitors, they clearly defined the audience as “data engineers.” The problem was, the product actually wasn’t even being used by data engineers. In fact, the founder said, “The actual user doesn’t even want to get the data engineers involved! They just want to get implemented and get going.”

So, using pattern recognition, we clearly defined the following:

The competitor’s playbook is: Overly complex product, at enterprise level deals that require broad sign off across departments, requiring many months to complete, at a high revenue potential.

And the startup’s path to win is: a dead simple product, that the actual user can pay for, that doesn’t require IT to implement, at a lower revenue potential but 1/10th the sales cycle. So, with this powerful trifecta, my pattern recognition again told me that startup’s winning hand is to expand the top of funnel dramatically to get as many customers in as possible. That would allow the startup to grow so fast that an acquisition, likely from one of these competitors given their poor playbook,jujjjjjjj seemed highly plausible.

The startup had a check-mate move against its competitors. The founder now had clarity on where the startup needed to play, how to message, and the category it was actually creating.

This discussion lasted one hour. But the pattern recognition was developed over years.

This collaboration left the founder stoked and energized to take on the market.

✅ It all happened in the first place because an investor’s pattern recognition combined with the founder’s experience, market insight, and skills, transformed two isolated voices into what the market will experiences as four part harmony. ✅

But don’t just take my word for it.

I once heard a great 1:15 clip of Adam Fisher of Bessemer Venture Partners and Harry Stebbings of 20VC where Adam talks about the importance of pattern recognition. The rest of the interview to excellent as well. The link to the entire interview is here.