Investing at inception does not exempt me from having to compete for the opportunity to invest in the best founders. My pitch to them is this:

"If I see a strong team with a compelling idea, I invest. I don’t need to see traction or customers or an MVP or anything really. Strong team, compelling idea, I’m in.”

My pitch lacks clarity on one important aspect: what exactly do I consider “compelling”?

“Compelling” is actually the wrong word because it suggests subjectivity. It suggests I will invest in ideas that I like. In reality, what I think of the idea is irrelevant. The only opinion that matters is that of the people who will supposedly be customers sometime in the future.

A compelling idea is therefore a validated idea. It is one where there is evidence that the thing in the founder’s mind is valuable enough that people will pay for it.

Existential Risk at Inception

I’m zealous about validation because, for any inception stage startup, customer demand is an existential risk. If the startup is going to fail, the most likely reason is that there is no demand for the product.

The stark reality is that more than 90% of what appear to be good product ideas are in fact not. If I mitigate this risk pre-investment, I, literally, increase my probability of success by at least 10x. The same logic holds for the founder, except they’re risking time, not capital.

Founders have two choices:

1. Build, brand, go-to-market and then find out if anyone cares, or
2. Find out now.

Time and again, and to their peril, founders opt for option 1. They are seduced by the delights of building and then rationalize their way to doing precisely that. “People need to see it to understand it” or “I’ll build the MVP fast”.

Founders fall completely into the build trap when they start confusing progress on the product for progress of the business. In reality, the business only advances when it’s derisked in some way. Building some piece of software derisks nothing because, especially these days, anyone can program anything.

This is why proof-of-concept almost never makes any sense. What is proven? That a certain spec can be coded? There was never any doubt of that and hence nothing to “prove”.

Fail Fast

The cold truth of a startup success is this: Unless every founding assumption about the product and the customer is actually correct (which happens approximately never), the founders will have to rapidly evolve their thinking to find product-market fit.

Survival is determined by how quickly one can affirm, adjust, or refute the existential assumptions.

If you make it your mission to fail fast, then you will strive to test existential assumptions immediately. The shortest path to truth rarely demands you actually build anything. It involves the unglamorous low tech art of engaging with the people you presume will buy your product.

Three questions need answers:

1. Do they have the problem you presume they have?
2. Is your solution what they want?
3. Will they pay you for it?

Getting accurate answers to these three questions is the most empowering thing you can do as a founder. It allows your to jump to version 2 of your product without writing a line of code for version 1.

The best founders will do this with as many prospective customers as they can access. And they will do it iteratively: test an idea with a customer, learn something, evolve, repeat. They might get to version 10, still having programmed nothing.

How-To

There is a right way to have these conversations to ensure customers don’t just tell you exactly what you want to hear. A line of questioning like, “Here’s my idea… Do you like it? Do you think I might try it?” gets you nowhere because the answer you’ll get will be something like: “Interesting idea! I’ll be happy to be a beta tester for you when it’s ready”.

So while the idea of talking to customers is simple, there is an art to doing it well. The key is to learn to not ask leading questions. Interview in a way that does not signal to the listener the answer you hope for. I will write a full article on how to effectively do this. It will basically advocate you follow three basic rules:

1. Talk about the present, not the future. It’s not “Would you use this?” Its “What do you do to about this currently?”
2. Talk about their life, not your idea. Discuss their problems not your solutions.
3. Don’t mistake compliments for affirmation. The only true affirmation is their willingness to commit time, money or their reputation in support of you.

Two Exceptions

For completeness, there are two scenarios where customer validation doesn’t apply:

Deep Tech: When the risk really is technical and demand is certain (cancer cures, cold fusion, flying cars, etc), then building actually does derisk a business.

Certain B2C Ideas: In areas like social media, gaming or entertainment you really can’t validate. Had the founders of Twitter surveyed people asking if they thought a blogging site where you can only write 140 characters had value, they would have never got affirmation and Twitter would never have been born. (I suppose one might argue that would have been a good thing, but that’s a different article.)

Back to SaaS

But in SaaS and especially B2B SaaS there is almost never an argument to build before validation. Any founder who eschews a validation-first approach is 10x to 50x more likely to fail thus wasting months or years doing so when they could have instead failed in a week or two (and then recalibrated).