Once upon a time there was a venture investor named Goldilocks. One day while lost in the woods, Goldilocks came upon a house inhabited by three startups. Since she had a new fund and a pressing need to put capital to work, she decided to let herself in.
The first room in the house contained the total market size. The first startup had a market size of $500M, growing to $4B in four years. “Too big,” thought Goldilocks. “A market this big will be dominated by big companies, not startups.“ The second startup she looked at had a market size of $25M growing to $200M in four years. “Too small,” thought Goldilocks. “A market this small was not likely to support a big business" ("big business" for Goldilocks was a synonym for "public company"). The third company had a market size of $100M, growing to $1B in four years. “This is just right,” she said with a smile.
Next Goldilocks walked into the room of competition. The first startup had many competitors, each with similar or overlapping messaging. “Too crowded,” thought Goldilocks. The second startup had no real or potential competitors. “Too small,” thought Goldilocks, “How can there be a sustainable market with no competitors?” she asked. The third startup had a couple potential competitors, neither of which had the right strategy, product and/or business model. “This is just right,” she said.
Goldilocks proceeded into the back of the house to the room of business models. The first startup had a sustaining CAC ratio of 0.25, due to low gross margins and high sales and marketing costs. “Too low,” thought Goldilocks. “A business model with these fundamentals needs radical rethinking, not a capital investment.” The second startup had a CAC ratio of 0.5. “Good, but not great,” thought Goldilocks. “A startup with these fundamentals should focus on improving sales and marketing productivity.” The third startup had a CAC ratio of 1.0. “Just right,” said Goldilocks, knowing this ratio could produce a growth engine capable of building a big business (which again was Goldilock’s way of not saying IPO).
Next Goldilocks walked up the stairs to the room of products. The first startup had a product and several paying customers, all acquired in the first few months of business. “Too much,” thought Goldilocks. “If it is really this easy, surely there will be many competitors.” The second startup had a PowerPoint presentation, but no product or beta customers. “Too little,” thought Goldilocks. “Do they think this is 1999?” The third startup spent several person years building the product out, had two referenceable beta customers, but none paying yet. “Just right,” said Goldilocks, knowing this must be a hard and defensible solution.
Across the hallway Goldilocks found the room of capital needs. The first startup was raising a series A of between $2-8M. "So is that $2M? Or is that $8M?" asked Goldilocks, who couldn't help but wonder how a startup didn't know its own capital needs. The second startup was raising $1.5M Series A. "Too small," thought Goldilocks. "Clearly this startup did not do its homework on our firm." The third startup was raising a $6M Series A, with a desire to syndicate it between two partners. "Just right," said Goldilocks.
Finally Goldilocks visited the last room in the house: the team room. The first startup had a few key members of the team who had build modest shareholder value in previous companies, but from very different markets than the current business. “Too different,” thought Goldilocks. “Will they really have the experience and passion to drive this business?” The second startup had an inexperienced management team, with lots of passion but no track record in building shareholder value. “Too risky,” thought Goldilocks. “Why take a risk on an unproven team?” The third startup had a management team with a proven track record in building shareholder value in applicable markets to the current business. “Just right,” said Goldilocks.
Just then the three startups returned home from their walk to find Goldilocks in their house. Meeting them at the door, the startups asked her what she thought. To the first startup Goldilocks said: “Let me think about it,” not knowing she would forget about this company by the time she reached home. To the second she said: “Take a seed round to prove out the product and business, and let’s talk in six months.” To the third she said: “Can you come back next week to meet a couple of my partners?”
Goldilocks and the third startup lived happily ever. Sadly the same cannot be said of the other two companies.