Christian Rangen: Best Strategic Elements To Consider To Be Funded-Startups And Scaleups
Luca
Good afternoon, Christian, I hope you are well.
Christian
Yes, Luca, I am fine. Thank you
Luca:
Let me briefly remind the scope of this interview Christian. It is part of research to what and whether qualitative elements in the founding requests from start-ups and Scale-ups can match with those used in strategic practices for SME and which ones, once applied, could improve the rates of approval by Funders.
Let me start with the first question.
Luca
What do you think about the weight of the financial projections or business plans compared to other qualitative elements in the evaluation?
Christian
It depends on its stage, but the financials would have probably had 20-25%.
Luca
The second question is related to problem statements and the discovery of value proposition. In your opinion, what could present difficulty for a start-up in managing these two points?
Christian
They’re both challenging, especially for first-time founders. I would say, probably the problem statement is the easier of the two. But they can both be challenging.
Luca
Can you give examples from your experience with all the companies you have worked with?
Christian
The challenge is often that many founders become very product oriented. They talk about product features. And it takes particular focus, exceptional attention to understand and focus on the problem statement and how well you can go out and either understand or discover it. And it’s because many people don’t have the training or the background, they’re not educated to think about this way. As a result, many founders talk about product, features, product features. And if you ask them, “so what do your customers need?”, their answer is: “Well, what do you mean, I have a great product”. And you say, “Yes, but what is the problem this product solves?” Next question is “What are you talking about? I have a great product.”
Luca
So, I suppose that it is a lack of knowledge. The next question is about market types: define the type of market. I found two acceptable definitions: The first is existing markets, where you can segment the markets or produce an offer that can’t be replicated. The second is new markets, where you can clone markets. You create something for the same market that is slightly different for any reason or find a new commercial use case.
Christian
They’re valid even if it’s a bit overly simplistic, but it is a good and easy and straightforward way to talk about markets, And a lot of the companies that I work with don’t think about the difference. So we really need to spend time together, like “are we pursuing an existing market? Is it fully developed already with a lot of competition? Or are we pursuing new markets? “Because those are very different paths forward.
Luca
Thank you. Now this is my burning question, why do you think that these definitions are valid?
Christian
Well, first, they are valid because they are simple. And that makes it easy for everyone to understand and grasp. Maybe markets definition is not valid as it’s not always white, or black or black and blue. Because even small markets do exist, but it’s typically looking at the growth rates. So that’s kind of the third leg like, “what are the key growth markets”? And how much are they growing? Because one of the best investment strategies that I see is if you’re going to invest in a young company that can get a good position in a small but very rapidly growing market. If they don’t screw things up, they will just sit there and be able to follow the market growth, and that’s great. So, you know, market growth and market development are the keys in my book.
Luca
Yes, Christian, I agree. It makes sense.
Now, what is the approach to solving the market potential issues that need to be defined, including competitors?
Christian
I’ll borrow a concept or a quote from Jeff Bezos, Amazon, “you shouldn’t worry so much about your competitors; you should be very worried about your customers”. Let’s took those two points, like your customer focus and insights, competitor analysis and insights. I would suggest, 90 maybe 95% of the time and energy going to the customers and then you know, maybe 10 to 5% towards the competitors, because more bets are won by making sure you understand and serve your customers, it’s not won by chasing in circles after competitors.
Luca
I understand it Thank you. What are the causes of these difficulties for defining market projection and discovering customers?
Christian
Well, I think there are two answers. One is related to who is in the leading positions within companies. So very often, those will be engineers, and economists or businesspeople. If you really want to understand customers, you should listen to the designers and the anthropologists. These people study people for a living so they will see very different things. But it’s still practised that you have hefty engineering focus and engineering people, businesspeople, and they will sit inside boardrooms and discuss product features and design choices, but not necessarily being design-driven. Understanding the user dimension of the products and services is a big flaw, and that’s why it’s sometimes complicated to understand.
Luca
I never thought about this; thanks for sharing it. Product: what do you need to present your products?
Christian
Again, I would suggest that it really comes down to what the customers need and product features. That’s one thing; talking about the value proposition is a different thing. And talking about how you’re solving problems for your customers, that’s a different thing again. So, for example, if we take one product – electric vehicle chargers, you can talk about the many types of connectivity: it has 3G, 4G, 5G, it has Wi-Fi, and Bluetooth has all these technical connectivity features. But it doesn’t matter. If you want to talk about what it does for the customer, you will say, “This electric vehicle charging product will lower your energy bill, and it will be safer for your house and your family”. So that’s the difference between talking product features and talking benefits and problems that solves.
Luca
Great, thank you.
Another question: How detailed should the business model be?
Christian
A business model is constantly evolving and changing. You can have the perfect business model in January, and then something changes, so by February, you have to change it. Thus, I’m not too concerned about how deep you go; I’m more concerned about being responsive and flexible as new information comes in. I also think that most companies should have many business models, they will have one dominant, and then they have others in the waiting. But of course, if you’re a start-up and want to raise serious money, i.e. more than five or 10 million euro, you have to be very detailed and analyse your business model and business plan very well. But the keyword is still flexibility.
Luca
Now let’s move on to validation. You have already gone through what is essential to show to the founders about clients. Now let’s assume that we have a minimal viable product, and we start to have some sales. But we don’t know what paying customers we will have in the future. These clients may not be long term. So how should we present them? What is essential to show to the funders about clients’ validation?
Christian
Different industries will have different practices. For example, many of the companies I work with are pretty young, so they don’t have many customers yet. Thus, what we’re doing is we’re often showing the pipeline, which, of course, can be split into different stages and levels. So, for example, you can say ‘we have a pipeline value of 200 million, ‘we have 150 high profile clients in our pipeline’, ‘we are hoping to sign customer number one next week’. That’s one way. And that’s a very legit way. Investor candidates can begin with the pipeline’s quality and the pipeline’s robustness. But of course, if you have many customers, you may want to segment them based on different segmentation variables and show that the information makes sense based on your knowledge.
Luca
Market Development traction: what is important to show to the founders?
Christian
I always suggest that the client selects the matrix and selects the KPIs that make sense, i.e. how many downloads do you have on your app? How many visitors do you have to a website? How many paying customers have you had in the last 24 hours? So, it’s about finding the relevant metrics for you and then focusing hard on those. In this way, you don’t get distracted by vanity metrics, which are metrics that don’t matter. I like balanced scorecards concepts, and we have developed three types of scorecards that we help companies get started on. You may want to have a distributed metrics.
Luca
Thank you, Christian.
Now we have teams. I don’t know how the founders evaluated the teams.
Christian
The team is essential. And some investors will say that the team is the most important, others will say it’s important, still, others will say that it’s pretty essential. But obviously, the team matters. It also makes a big difference if you have a single founder, so just one person. For example, if you have a proven team with a lot of experience and exits behind them.
Luca
Now about culture. Is this qualitative element important? What could the funders look for?
Christian
Culture, if it’s the right kind of culture, is significant. Sometimes, especially with very young companies, it’s a little bit hard to grasp. Because you know that maybe there are only two or three people in the company and the culture hasn’t developed yet. But of course, developing the right culture can be a strong advantage and it matters. But you can also have very different types of cultures. For example, Uber has always been well known for its highly hardworking, hard-charging culture, which the founder very much drove. While other companies will say it’s more important to have a collaboration culture, thus different organisations will have different answers.
Luca
Thank you very much.
We are now in the refinement stage, and we have slightly increased the sales. Is what you said before still valid here, for example, KPIs?
Christian
Again, different types of investors will look for different things. For example, if you’re raising money from your friends and family, they want to see your excitement and energy, know they’re putting some money in, and wish you all the best. If you’re raising from business angels, they probably want to see a big opportunity for themselves. If you’re racing for professional venture investors, they probably want to see very, very different things. So, different investors will want to see different things in different stages.
Luca
Culture in the stage of refinement. Does the evaluation change? Do they expect to see something different compared to the other two phases?
Christian
It’s a little bit hard to say precisely. But, by now, you should start seeing the outlines of culture. So, yes, you should see it here and at what level it has been developed. It is critical to sustaining growth.
Luca
This is the last stage, scale-up; this is one of the two final provoking questions.
In terms of the product, what should the service elements show at this stage?
Do you need to show that same product to scale up? Increasing or improving the features, or do you also need to show that you will increase the number of product services you include?
Because scale up at this moment, in my opinion, is when you make a big step because you want to sell more, but at the same time, you are looking for a market to be consolidated. So, there is a connection between refinement and scale-up and scale-up and market consolidation. What do I need to look at here in terms of the product /services?
Christian
During the scale of stage, you should see incredibly high sales growth rates. It should really be what we call products flying out of the shelf.
Luca
What about the product?
Christian
Well, the product should be, you know, fully finished. You should have your product-market fit and your price. You should have your distribution channels. So, you know, many things should be in place at this stage. There should also be a long list of key clients, again depending on segmentation, probably different types of clients across your segmentation model. Still, you should be able to show genuine customer attraction.
Luca
Right. Now which one of these standard strategies can be applied to the scale-up stages?
· Market penetration,
· Market development,
· Alternative channels,
· Expansion
· Market segmentation
· Partnerships.
Christian
I would think that all of them are applicable.
Luca
Are the intangibles critical to receive a positive valuation from funders across the stages? Brand? Founder’s education, knowledge and so on? Let’s start with the brand.
Christian
The short answer is yes. If you look at the valuation of most publicly listed companies, most of them since the 1960s have been more and more valued based on their intangible assets today. In many cases, the valuation is purely driven by intangible assets, including data brands, reputation, people. In addition, start-ups typically don’t have many assets: they typically don’t have a lot of hardware inventory, buildings, or production factories. So, intangibles are about 90 95% of the valuation for many start-ups. So, intangibles matter.
Luca:
Dear Christian, I need to say thank you for this insightful interview.
Christian:
You are welcome, and thanks for the opportunity, Luca
