I was recently working with one of my portfolio companies to introduce some potential follow-on investors and help them navigate that process. The company, which I’m not going to name in this post, is building a pretty critical piece of IT infrastructure for a very large but difficult to penetrate segment of the economy. The investment thesis has two central components. The first is that this piece of software will unlock a massive logjam of pent up demand for IoT deployment. The second is that this particular startup will be able to sell its SaaS infrastructure platform (1) rapidly (2) to multiple customers (3) without writing any custom code and (4) that, over time, customers will pay in the low- to mid-six figures for the technology.
As an early-stage investor, I’ve spent a ton of time with the CEO understanding the market, the technology/product, existing customer relationships, and the opportunity. There’s a lot we don’t know, but a lot we do. And then there is that one thing. Let me explain.
We pretty much know that the market opportunity (the first part of the thesis) is real: our customers are very consistent about that and there is plenty of other market signal here. The second part of the thesis is a bit more tricky. We know that the company can sell pretty rapidly. They have about eight paying customers and/or signed paid pilots in three different countries, and some of those customers are important reference customers within this industry. They did that without writing any custom code, without raising any real venture money, and without any sales people (the CEO’s deep background in enterprise software product management and sales helped a lot here). What we don’t know yet — what we can’t prove — is that the price point will be high enough to build a large business. That’s the one thing, however, that is make-or-break for this company. And it’s both the one thing we can’t yet prove and the one thing that the best VCs struggle to believe. In the words of one VC, “show me one customer paying you $250K, and I’m in.” More on this in a moment, but let’s talk about the “one thing” and what it means.
Defining the one thing
For an early-stage startup CEO, the one thing is the single central proof point of the round you are raising. It is something about which you do not have sufficient evidence to prove conclusively, but it is something that when proven will sufficiently derisk the company to make the next financing round much easier. In essence, the one thing is the thesis of the round you are in. It’s the thing you are betting the company on.