This week, behavioral economist Richard Thaler won the Nobel Prize in Economics. Thaler is best known for his work for disproving the traditional assumption that people make completely rational economic choices. If you’re a founder and not interested in behavioral economics, you should be. A great place to start is Dan Ariely’s Predictably Irrational.
A few days ago, I mentioned the possibility of putting together a few posts on pitching and fundraising topics that are not covered as extensively as others. One particular topic that is often touched upon but, as evidenced by Thaler’s work, cannot be over-emphasized is the ability to demonstrate profoundly deep knowledge of your customer.
This capability is almost impossible to fake. Either a founder speaks regularly to customers, both in-person and through data, or they do not. Founders who have this deep knowledge are often able to easily speak to the customer behavior that is unique to their industry, and explain exactly which steps they took either with the product or the sales process to exploit these behaviors to the tune of traction.
A few real-world examples from startups include:
1) Understanding that in older, more entrenched industries a full technological leap may be unwanted or not possible.
There are a multitude of reasons this is the case, but the three that immediately come to mind are: too risky from a financial or operations perspective, lacking the internal technical talent to implement or learn a new software, and the “that’s the way it’s always been done” mentality. The quote below from Invenergy Future Fund partner John Tough perfectly sums up how founders should think about disrupting these industries.
No new technology solution is going to completely rip & replace existing software. Start-ups that expect to dramatically replace existing software architectures and make generalizations about weakness of existing solutions simply have not done their homework. @johnjtough
We’ve seen attempts to overcome these hurdles through slow-roll outs (note: slower revenue growth), taking increased responsibility for implementation (potentially higher costs), and inserting a human element into the process, think customer starts online but confirms via telephone (higher CAC).
Obviously, none of these options are ideal but are often necessary to gain traction within these legacy industries.
2) Learning that, much like B2C, in Enterprise SaaS it is still necessary to build for the end user.
Telling a visionary entrepreneur not to build the sleekest designed or most technologically advanced product possible seems counterintuitive. But, depending on your customer’s end user it could be the best possible strategy and a great way to conserve already constrained resources. We came across this insight personally at Choose Energy on the B2C side and it recently surfaced again with a B2B startup with which we met.
Since I want to maintain the startup’s anonymity, I’ve made up this fictional example so please excuse me if it seems completely ridiculous on multiple levels.
Imagine building a software that optimizes call center or chat volume through algorithms based on inputs from the call-center agents themselves. Who should the startup be building for?
My answer would be the call-center agents who are responsible for the inputs. The algorithm is only as good as the data it receives from the agents, who in most cases will be high school educated workers who are not interested in learning the newest technology but simply want to get the job done as efficiently as possible. A simple product that interrupts their workflows as minimally as possible is the way to go.
3) Adapting to a communication style that makes the customer more comfortable.
Some new tech expressions can sound scary, especially to those in industries that have yet to be largely disrupted.
While phrases like “machine learning” and “artificial intelligence” can sound great in a deck or pitch meeting, potential customers often hear those words as the potential to remove the human element, i.e. them.
Another common phrase in the tech space is “cloud storage”, and while we think reliability and ease of use, some older industries think “unsecure storage.”
Founding teams who are exceptional at sales strike the right balance of communicating the value of their technology to management, get buy-in from those who the software will impact most, and make everyone comfortable during the process.
Knowing your customer is crucial in any business, but special founders are able to demonstrate unmatched insights into their customers. More importantly, those founders turn these observations into distinct competitive advantages in sales, product, and marketing.