I sat down with Prashant Shah of Hummer Winblad Venture Partners last week. I was curious to hear the view from his vantage point as an investor. How does he gauge customer validation, and what impact does it have on his investment decision? What advice does Prashant have for technologists seeking funding from his firm?
Customer Validation Litmus Test
Not surprisingly, founders must validate their product with customers to get Prashant’s vote. He can usually tell by asking the following two questions:
1) Why would customers make a buying decision?
2) Why would they buy from you?
Prashant finds that tech entrepreneurs often go on at length about describing generic market pains, but have a hard time giving him a credible answer to the question: Why would customers be compelled to change their status quo and make a buying decision? To illustrate his point he gave me two examples:
Geico: Their lavish campaigns tout that they can save you 15% on car insurance. Fine. Granted we pay too much for car insurance. But in the grand scheme of things, lowering my auto insurance is low on my priority list contrasted to bigger expenses such as housing. I am not compelled to make a switch to Geico when I see those ads. Those campaigns fail to pass the first test. A quantifiable ROI is not enough for customers to make a decision to buy; it needs to be an ROI that matters.
Virtualization: On the other hand, expanding the use of — and realizing savings from — virtualization is high on the list of priorities for enterprises. And companies such as vKernel, Pancetera and EvoStor (all of which Hummer invested in) can use this natural market momentum to get in front of customers. These start-ups don’t have to convince customers that what they are doing is important to them; their ROI already matters.
Overcoming the Barriers
I asked Prashant why he thinks technologists have a hard time answering his litmus test questions. The problem, he thinks, is that technologists excel at mastering technical problems, but have a hard time understanding behavioral customer dynamics.
He gave me the example of his brother, a distinguished engineer who tried to dabble in real estate as a hobby. Prashant’s brother got his license, and was bewildered to find out how difficult it was to understand customers when he held his first open house. He didn’t expect them to be so fuzzy in making a buying decision (thinking about furniture and such!). It was too much for his logical engineering mind.
Engineers are not always able to see the world through the customer’s eyes. Prashant cited an engineer who could not grasp why a 3-step install was too cumbersome for customers. “If it works, what’s the problem?” The engineer was furthermore convinced that if he made his procedure simple the customer would not fully appreciate the value of his (enterprise) product! [Note that seen through a customer’s eyes a simple procedure is valuable. Seen from this engineer’s eyes, a simple procedure would hide the value of his creation].
Another barrier Prashant sees is that technologists often don’t know what to do to validate their products with customers. Many ask the wrong questions. As a result, they get marginal feedback on features: “Yes this feature is good/not good”, but fail to gain insights on what would make a customer buy.
In that light he sees a need to help technologists better understand how customers think. [And we seek to address those very questions in this blog].
Prashant’s Parting Advice
Prashant advises technical founders to seek a co-founder with a customer bent to complement their strength. He reminds them that addressing the technology risk is not enough: they must tackle the market risk and get clarity on “why would a customer be compelled to make a buying decision?” In fact Prashant places the market risk higher than the technology risk.
Good advice to keep in mind. Founders be warned if you are seeking funding from Prashant. Be prepared to answer his litmus test!