VC View: Customer Validation Litmus Test

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!

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3 thoughts on “VC View: Customer Validation Litmus Test

  1. Solid advice from Prashant. A few thoughts come to mind:

    Building a great product doesn’t mean somebody will pay for it. Plenty of precedence for that.

    Just because somebody pays for it may or may not make it worth your while to sell it to them. The value of the customer (immediate, short term of even lifetime value) is something you have to determine and that varies by the stage your company is in, the intent of the company and the profitability for each group of customers.

    Companies sometimes hyper-focus on price while ignoring other contributing factors (to the price and to the success of the company as a whole) like branding and positioning and the clarity and consistency of the message the company is communicating to its customers.

    Just because some people will pay for it doesn’t mean many others will. Even if they ‘sign up’ with a free account, do they actually use it after the first day? What are your user loyalty statistics? What’s your repeat usage rates? What pain point did your product/service address that others didn’t? The signup might be the wedding, continued use is the marriage. Countless questions you can ask to get you closer to understanding your customer segments.

    Even if your product has traction, do you actually know why? A lot of companies assume and that’s a huge mistake. Companies really need to get inside the head of their clients to find out why your customers are your customer. Those who don’t get unexpected push back from clients they could have avoided had they communicated and engaged their clients.

    I see these mistakes all the time in the startups I deal with and when I ran my own companies. So glad you’re pushing this message out to people. Definitely a need.

  2. Hi Sylvie,
    I agree wholeheartedly. In fact, Prashant echos some of the points that we discussed yesterday. I particularly like to point made that satisfying Market risk is so much more important than Technology risk.

    Since 2001, when companies stopped buying Technology because it was “neat”, I have seen / consulted with many companies that were offering great technology but without focus on who their customer was, and why they would buy.

    We finally convinced the producers that if their product does not save money, or make money for the customer, there is no sale.

    Another point is that engineers, for a number of reasons, see their offering’s value through their own eyes and have great difficulty seeing from the customer viewpoint.

    Again, know your customers, their habits, pains and why they would find value in your offering.
    Gee, is this Sales and Marketing?

    Chuck Scifers

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