GAS ON A FIRE
Making sure a start-up doesn’t go up in flames
At RCP, we have a phrase we talk about when meeting potential investees: when we invest, we want to put gas on a fire, rather than help someone find matches.
What does that mean? It means that we want to help a company grow and scale once they can demonstrate some product/market fit. We want our funds to make a measurable impact on the trajectory of the business; we don’t want to give someone money who is still trying to come up with a solution to a problem, and can’t show evidence that customers need that solution.
So, how can you demonstrate that what you’re doing solves a real problem? There are a few ways and each business may have a different approach. Revenue is one - are customers buying the product or service as fast as you can make it? Surveys are another - do customers say they can’t live without it? Churn and renewals may be another - is customer churn dropping with every cohort and/or customers renewing at strong rates?
Why is this important to us? Because it demonstrates that some segment of customers will pay for what you’re building. That means there may be many more out there to sell to. And that means there is a potential path to an exit for investors.
If you don’t have it, that suggests that there may not be a big market for what you’re building. And not being able to show a market need is the biggest reason start-ups fail.