Startups that are looking for funding might think an innovative product or service is what will wow investors, but Erik Rannala, cofounder and managing partner of the seed-stage venture fund Mucker Capital, says that’s just one piece.
Investors are comparing your focus and strategies to winning companies, says Rannala, who led eBay’s premium features business from 2002 to 2005, during the time the company's revenue grew from $124 million to $410 million. "We can usually tell if you’re firing arrows and then painting bull’s eyes around them," he says.
Rannala chooses startups by looking for four characteristics that helped eBay become an e-commerce powerhouse:
Every business has to fill a need, but not all are truly focused on their customers. And while it sounds intuitive, a lot of businesses don’t have a clear picture of what the customer wants, says Rannala.
"This often happens in the tech or software world; the focus gets put on the product," he says. "But you can get too focused on the product and not on the problem you’re solving or who your customer is. You never want to be a solution looking for a problem. You always want to identify a customer need, segment, or market opportunity first, and then build a product."
One way to become customer-centric is to talk to customers and ask for their feedback. Another way is studying what customers do with your product.
"There is no substitute for actually talking to your customers," says Rannala. "This was always a top priority for us at eBay. We had regular conference calls with power users, usually multiple times per week. We’d discuss their experiences and ask for feedback on new feature ideas."
When Rannala invests in startups today, he looks for founders who are obsessed about doing the right thing for users: "Startups that have actual conversations with their customers pick up creative ideas and paths to improvement that number crunching in isolation will never uncover," he says. "Conversations can sometimes validate your hypotheses before you ever write a line of code."
Doomed startups tend to operate according to their own assumptions and opinions, while winning companies solve debates by testing and measuring results. eBay, for example, tests its products down to the smallest details, says Rannala.
"When my team wanted to introduce new features for sellers to promote their listings in search results, some of our colleagues hated the idea because they felt that the features cluttered the UI and were visually unappealing," he says. "By testing the impact of listing upgrade features, we found that sponsored listings had dramatically higher conversion rates and commanded significantly higher prices."
From the color of a button to its size or placement, things that seem like minor details had a massive impact on revenue and conversion rates, says Rannala. "The benefit to our users and impact on the bottom line was borne out in the data, irrespective of the diversity of opinions on design," he says. "When you pitch investors, be prepared to discuss why you do the things you do. Are there sloppy assumptions or good data behind your decisions?"
If you’re not looking at data in a granular way, it will be impossible to manage or grow your business. While measuring and testing are related, they aren’t necessarily the same things, says Rannala. "You can measure outcomes that aren’t tied to any particular hypothesis, and that data can still be incredibly valuable," he says. "Measuring is as much about awareness as it is about evaluating the results of particular experiments."
At eBay, for example, Rannala knew that sponsored listings worked, and he set out to measure their value by running detailed studies about the impact and ROI of these features.
"Testing can validate an idea, but to tell a good story to investors or customers, you have to measure everything you do and understand the implications and opportunities for your business," he says. "We drove adoption and revenue by marketing those findings to sellers."
A company’s culture is driven early on by its founders, and successful startups have founders that understand this fact. As a business grows and people get disconnected from the founder, however, hiring becomes critical because the culture becomes the sum of the company’s people.
"One employee can change your culture, and hiring is super important," says Rannala. "It sounds harsh, but a lot of early-stage companies grow dollar by dollar and have no capacity for folks who aren’t adding value. It robs resources and affects morale."
Investors will judge founders by the quality of the people they hire, and Rannala says a red flag for him is a team with lots of self-proclaimed "experts" who lack any notable evidence in their professional or personal lives to back it up.
"At eBay, I found that the best people I hired often may have had no applicable experience to eBay; however, they had intellectual curiosity, raw horsepower, and a bias for execution and just getting shit done," he says. "They were exceptional in their careers, education, and personal lives. They were independent thinkers willing to test their ideas to see if they were any good. They were willing and capable of learning any skills they lacked."
When investors ask why you hired so-and-so, what will be your answer? asks Rannala. "Did you need a warm body with the right skills, or did you hunt relentlessly for an uncompromising superstar who will radically impact your company?" he says.