Once upon a time, I met a startup team.

The Founder and CEO was named Gary. Gary’s company possessed a powerful non-obvious insight about the market it was in.

For context, a non-obvious insight is one of the most important aspects of a startup that Tundra Angels looks for before we invest. This can also be called a breakthrough insight.

I heard the term non-obvious insight from Andy Rachleff and I really like it. It gets at the essence of what Peter Thiel writes in his book, Zero to One, “The best entrepreneurs know this: every great business is built around a secret that's hidden from the outside.”

A non-obvious insight is something that the startup sees, hears, or observes about the market or the way that a market functions , that others do not. A strong non-obvious insight leads to a different strategic angle of attack than the rest of the market. For my post on how to identify and build non-obvious insights, check my post here.

There were three different actors in this the industry ecosystem where the startup played. Gary’s non-obvious insight revolved around seeing that all of the software companies and startups were built around the consumer, one of the actors in the ecosystem. But importantly, Actor 2, who provided the services to the consumer, actually was the actor that fundamentally powered the entire industry. The founder had specifically identified several key ways where Actor 2, if empowered properly with the right value proposition and software, would tilt the sails of this industry.

Additionally, the founder was dynamite. The kind of founder that can sell something to a brick wall. It was the kind of founder that Tundra Angels looked to invest in. I like a lot of the components of the startup opportunity.

Yet, startup investing is so multi-faceted that for an investor, similar to a Rubix cube, it makes no difference if three sides are all one color. Every side needs to be aligned and the uniform color to proceed with an investment.

The Level of Problem Awareness

In evaluating the startup’s go-to-market strategy, we honed in on the level of problem awareness in the market. For context, there are five levels of problem awareness. This is from Justin Welch’s post, but I have heard it other places too.

• Problem Unaware: I don’t know I have a problem.

• Problem Aware: I’m aware I have a problem. How do I fix it?

• Solution Aware: I’m aware there are solutions, but not yours.

• Product Aware: I’m aware of your product. Why are you the best?

• Most aware: I want your product. Make me an offer I can’t refuse.

Through our due diligence, we discovered that the market existed largely in the Solution Aware stage.

One headwind of a Solution Aware market is that the market needs to be educated on the superiority of a product before it can be sold.

In addition, a Solution Aware market often times has customers that are already using existing alternative products. In this market, sure enough, there were 2-3 software solutions that the majority of customers used.

Often then, the opportunity in a Solution Aware market is more often about stealing market share away from an incumbent than it is about selling to customers that don’t have anything. So, the go-to-market strategy largely becomes more about the startup getting the attention of a customer, and educating and convincing them to buy.

Now, because of the non-obvious insight, I was convinced that these incumbent solutions were and still are built around the wrong ecosystem actor. I came to believe that Gary’s non-obvious insight above would create the best harmony in the market. (For the record, to this day, I still believe that this non-obvious insight is the one that will create the best equilibrium in this market.) Thus, I wasn’t immediately swayed by the competitive solutions. I thought that Gary’s startup’s product would have enough grab to rip customers away from the incumbents.

As we continued to review the startup, Gary was frequently converting customers away from alternative solutions - an initial positive signal that confirmed my hypothesis.

A Largely Off-Line Customer Base

So, then the analysis became a question of evaluating the speed at which the startup made contact with prospects. On the customer side, Gary had identified the particular customer role that was the decision maker to buy their software.

We uncovered that this particular market had one unique dynamic - specific prospect at the customer firm was not very tech savvy and was largely off-line. Customer firms would have a website, but only so that it had some presence on the internet. Furthermore, the prospects themselves were not actively checking or staying on top of email. Business was done via phone call and text message. Unfortunately, this dynamic took a number of scalable marketing tactics off the table.

So, in case of this startup, cold-calling was the tactic of choice. The startup would find and scrape lists of potential customers and cold call their prospects. Gary and his team would get the prospect on the phone, tell them about their software and educate the prospect about why their startup’s solution is superior, and try to sell them on a demo of the software.

Cold-calling is an important tactic - but it’s scalability is limited. Gary found his company in a dilemma - the main thrust of the startup’s go-to-market was time and resource-dependent.

Namely, the math equation of customer acquisition had a limitation - how many calls one can make during business hours, how many times someone spoke to a decision maker, the call to demo conversion percentage, and then percentage that a demo converted to a sale.

✅ For a startup to win in the market, it needs to go beyond its own input of effort in customer acquisition. ✅

One major way this can happen is if customers are evangelizing and bringing awareness of the product to other potential customers.

Evaluating the Startup’s Word of Mouth Potential

So, we then looked at if customers were inclined to evangelize the product on behalf of the startup.

From our customer reference calls, we discovered that customers loved the startup’s product. One customer even told me, “Quite frankly [buying this product] is one of the best business decisions I’ve ever made.” WOW!

With a comment like this, I then expected to learn that customers were frequently evangelizing the product to others, which would be the missing piece that the startup needed to overcome the cold-calling slog.

But, I didn’t get that at all.

When I asked the customer about word of mouth, the customer looked at me blankly. The customer was ambivalent, or even possessive about the product. He essentially said that he wasn’t going to go out of his way to tell a potential customer about the product. It didn’t create a win-win for each other. (I write about three different word of mouth postures that your customer could have in this post.)

So taking all of this into account, we had a market where…

• Customer prospects had a competitive solution and were not actively searching for the startup’s product.

• The prospect was largely off-line. This meant that the startup had to show up to each prospect in an very manual way, cold-calling which is time and resource dependent. There was little ability for any scalable marketing tactics such as paid media or SEM, things that are independent of startup’s time and effort.

• Current customers, who were very happy with the product, were not actively evangelizing the product to other customers.

✅ It became clear that this was a market that the startup would have to win the war by fighting on every hill, essentially by their own effort.

There wasn’t any air cover from scalable internet-based marketing tactics or from the customers themselves.

From a scalability perspective, it seemed to be really bad market to scale quickly into.

The Perennial Fundraise of Small Checks

Through our due diligence process, we also reviewed the startup’s cap table.

If I were to show the cap table of this company, it would feature the stockholders in one section. Then, below that was a long list of investors who invested in SAFEs, most of whom were written in for $5,000 or $10,000 checks with entry dates of a week to three weeks between each investment.

The startup was literally fighting a monthly battle of continually closing investors to get cash in the door just keep the lights on.

I felt for Gary.

Now, I give Gary an immense ton of credit on his tenacity. I rarely have seen that level of founder tenacity and boldness.

But, Gary was fighting a larger battle - this perennial fundraise is extremely hard to break out of. It’s like feeding the dragon.

Worse yet, there was not a large customer on the horizon that, if converted, would provide a wave of cash that the startup could use to move away from the edge of the cliff and reset. Unfortunately for the startup, the market was comprised of similar size customers with none providing extraordinarily more revenue potential than others.

Thus, the cash crunch had no tangible and practical end in sight.

Closing Thoughts

Saying no to any startup founder is never easy for me. But this one in particular was a harder one to say no to.

Sometimes, in their mind’s eye, founders might ask themselves a question like, “What can I do to make [this investor] invest in me?”

✅ Founders don’t want to hear this. But sometimes, the unfortunate answer is, “It’s not you. It’s your market.” ✅

If Gary were transported into a different market with different dynamics, I have very little concern about him being successful. In fact, one of our Tundra Angels investors noted this very thing, saying to me in an email,

“This is a hard one for me to say "no" to, because Gary is so passionate and I think he will have a very successful exit during his career.”

It’s a good reminder how much the backdrop and the scenery, that is, the market, contribute to the likelihood of startup success. But if the founder has a strong and tenacious skill set out of the box, and is forged in the fire of experience and learnings, that same founder may be highly successful in another context.

This is a case of where the founder in this episode of the “Why We Invested in this Startup” series, may or may not down the road, become a future post of Why Tundra Angels Invested In…” Because when or if this founder does something else, Tundra Angels will be there… looking to lean in.

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