May 5, 2021
In early stage venture, determining those important signals that indicate investment potential and traction are critical.
One way to do so is through this concept of power as Geoffrey Moore, Author of Crossing the Chasm, Speaker, Advisor and Venture Partner at Wildcat shares...
“Power is an attempt to say, what are the leading indicators of success in business just as performance it’s a trailing indicator of success. And what you find in investing is, an investor buys a share of your future earnings, not your past earnings.
And so therefore how can they expect you to perform in the future? So you're always looking to say, how powerful could this company become? Cause that's, what's going to increase its market valuation. Now that's true in public investing, but it's even more true in venture investing because the power is so nascent.”
Power is actually a hierarchy and the prioritization of this structure is based on the impact each step has on a company’s future performance. In fact, this ordering comes from public markets and is adjusted to venture dynamics.
As such, this hierarchy can be leveraged as an investment framework to determine where the trapped value lies and how to identify the traction behind it.
Power Concepts - A Five-Step Hierarchy
There are five steps to this power hierarchy: Company power, Category power, market power, offer power, execution power.
Category power is at the top of this hierarchy because venture investing is focused on nascent categories that are expected to blossom. In fact, the category may not exist quite yet but the technology does. So when doing an investment, you inevitably start with the question “what categories are we in and are these categories getting traction?”
Market power is different from company power in that markets are defined by a set of customers and categories are defined by a set of competitors.
An early stage company delivers market power by winning devoted customers who advocate on its behalf, thereby speeding up sales cycles and creating a local market that can attract a local ecosystem. It’s growth from customer relevance because the offers address segment-specific concerns with domain expertise. And the end result is company power in a niche that is both persistent in its own right and a potential stepping stone to greater things to come.
Offer power is defined as the feature/function/performance status in comparison to competitors. In established markets Geoff tells us that product managers are always looking to have the best set of these points of differentiation in their competitive positioning charts. But in venture, it’s more asymmetrical.
Early stage companies need need to find at least one dimension where there is a 10X advantage, something that will warrant customers and ecosystems going through the pain and strife of disruption to adopt the offering.
The last step in this 5 step hierarchy is execution power. It’s about getting to the next milestone in a timely fashion because growth ultimately stems from managing those portfolio of commitments.
To create that necessary performance traction, the team must redirect its execution power from building and serving everyone in the early market to being very narrowly focused on a very specific audience segment, industry and use case to cross the chasm. It’s being able to transition from the interest of those early adopters of a product to the mainstream early majority.
The Power of Digital Transformation
One category the Wildcat team is laser focused on in particular is Digital Transformation. Bryan Stolle and Grahme Taylor shared insights on where they see the space going in episode six and seven.
This category has significant power based on where is capital moving into and where new technology displacing capital that used to be spent in an old way.
This is actually a meta category - a horizontal and vertical. It's happening in every single industry across the globe as the world now moves towards an experience where billions of people on the planet have the power of a mainframe computer in their pocket. This gives businesses the ability to communicate with them 24x7.
So the post-pandemic operating model for any industry and company needs to be a digital first model. Therefore an enormous amount of money has to go into that which leads to significant opportunities for incumbents as well as the next generation of venture backed startups.
Crossing the Chasm and Its Link to the Power of Company’s Traction
This hierarchy of powers: Category, company, market, offer and execution offers a framework for venture investors to truly understand those signals that can predict performance.
This investment framework is linked to Geoffrey’s B2B market development model of transitioning from the interest of those early adopters of a product to the mainstream early majority, as outlined in his book Crossing the Chasm. Crossing the chasm means creating the opportunity for hyper-growth and market success, and by doing so, a venture company ultimately delivers market power in a market that is big enough to matter, small enough to lead and a good fit with their crown jewels.
Where the Trapped Value Lies Through the Lens of this Investment Model
What should an investor consider when evaluating companies through the lens of this investment model and determining where the trapped value lies?
There are several ‘power’ signals which roll together in concert because growth is a function of power and the more power you have, the more you're going to grow.
Geoff indicates that the power of an early stage company cannot truly be assessed on the traditional performance metrics like the return on investment.. Prior to being at scale, what's important to assess is how that company’s revenue ties to them gaining power.
“You still measure revenue because revenue is how you're competing in the world. It’s how we know whether you win or you lose. So it's an important signal. What we're really trying to signal is not how much profit did you make because often you're still losing money.
People wonder, how is it possible that Uber becomes so valuable and loses money? And the answer is because the world believes that by losing money, they're gaining even more power and therefore they're even more valuable.”
Geoff also highlights that there are key measures that signal power. One is when a company lands at least one marquee client. Another is when they show dominance in their target segment. That momentum turns into partners who are looking to work with the company and build an ecosystem around them. Ultimately the company becomes the word of mouth choice for the segment.
Collectively it’s all these signals that become valuable markers that assess potential and investment momentum.
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