How rising VC expectations are causing founders to ignore user experiences in favor of unsustainable growth.

The trouble with innovation…

Through my experience as a repeat technical startup founder, I’ve found the greatest difficulty in developing a new technology is not getting something to function. It’s discovering that a user’s tolerance for learning a new workflow is frustratingly low. People are seeing something that’s different, but they are experiencing it through the lens of expectations they’ve been refining over their entire lives… expectations anchored by existing solutions that are measurably worse than the shiny new one.

There is some amount of friction inherent to the adoption of any innovation. A company must immediately convey the value of what they’ve spent months, or years, building. In the world of software, there’s a very brief window of time when a potential user can be convinced that a product meets their need. If a user is not aware of their need at this point in time, then the company faces the additional challenge of educating a consumer. Good Luck!

In no other context is this friction as essential to overcome quickly as in that of a startup. Startups are organizations with a lit fuse. Financial backers have given them a chance to test a new idea. They are operating at a loss, and will go out of business unless they raise additional capital in the near future… and that’s with a dedicated team working long hours at below-market salaries. Investors, employees, and even the founders assume this risk because they believe that their efforts will eventually be rewarded by a lucrative market segment in dire need of their offering.

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Why so many startups fail so early.

Everybody knows most startups fail, but what’s surprising is that 70% of seed-funded companies do not survive long enough to raise a subsequent round. In the venture community, this trend is better known as the Series A Crunch, and I believe it’s a consequence of rushing to market without having established sufficient product desirability — or, in Venture Capitalist parlance, traction.

Startup founders are adept at identifying pain points having a business opportunity, but struggle to deliver solutions users choose to adopt. Most often this is due to a realization that their intended market simply does not need the delivered solution.

Recent trends in venture capital have exacerbated this pattern. An increasing aversion to early-stage execution risk has caused the average initial funding round to shoot up 62% to $1.3MM from $800K in just the past year (in my home market of NYC seed rounds now average $1.8MM). This has, in turn, led to ever-increasing valuation expectations from would-be mid-stage VCs. This pressure combined with the monetary firepower of fresh funding leads many recently-funded teams to swing for the fences.

Founders believe they have been given a mandate to scale fast when, in reality, at this stage, they are still determining if their early product success will scale to their intended market. They are building bigger and more fully featured systems before finding out, much more often than not, that they made a bad assumption without enough of a financial runway remaining to correct for it.

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Make value delivered the metric of success.

To survive the challenges of mid-stage financing, founders must avoid falling into the dangerous trap of investing in growth without first ensuring they’ve created an irresistible user experience. They can do this by instilling a culture of value creation. A startup must make regular honest assessments of the usability of its products. They should take a moment to interview loyal users — as well as some who have churned. They should learn to love meaningful product-engagement metrics (such as retention, or the number of key interactions), and prioritize them over investor-friendly vanity metrics (such as the number of signups). Lastly, and perhaps this is the trickiest part at scale, they must learn to continue testing new ideas with minimal engineering within a maturing product and organization.

This mentality will assure a company, and its investors, that there’s more success to be found beyond early adopters. In the likely event that something unexpected is learned, opportunities to apply course corrections will emerge early. If desirability metrics hold as more users are introduced to the product, then interest from mid-stage investors will be certain to follow. If they do not, as many unfortunate startups learn way too late, then neither growth nor VC dollars will come.

Author

Harlan Milkove is a repeat VC-backed startup founder, and Managing Partner at Foundational where he works with early-stage startups to expedite their pursuit of venture capital. His prior venture Reonomy, a commercial real estate data analytics platform, has gone on to raise $125M+.