The Venture Investing Expression Part 2: Depth of the Market Problem 

By Matthew Kee

July 26, 2023

Investor Psychology

Reading Time: 3 minutes

Reading Time: 3 minutes

In the first post, I put forth the “Venture Investing Expression” below:

✅ Depth of market problem ∝ solution fit  non-obvious insight  traction  business model  market size  go-to-market strategy  team execution potential  status of fundraise  valuation  stage of business ✅

👉 In this, let’s unpack “Depth of market problem ∝ solution fit” 👈

Stating the obvious, startups exist to resolve market tension. Tension, or market problems take place in context. Namely, a market, and with actors in a market – customers, influencers, etc. 

Yet, not every problem A) Should be solved, or B) Customers will pay money to solve, and C) Can be monetized with substantial margin.

Furthermore, investors cannot be experts in every industry. Thus, upon hearing a startup pitching their solution for a particular market problem, the investor is likely not familiar enough with the nuances of the market enough to make an accurate judgment as to if a customer will pay money to have that tension resolved. Tension exists everywhere, but there is a finite set of market tension that actually can be monetized. 

Therefore, as investors have a high velocity of startup inputs and it is humanly impossible to understand all industries, investors need to take a mental shortcut to be able to make a decision if they want to have a second meeting with this startup. 

Thus, investors tend to evaluate the depth of the problem based on the potential customers’ response to the startups’ solution

✅ More specifically, I would propose this expression: the devastation of the market problem is directly proportional to the desperation of which the customer moves to pull in the solution. 

The key simple question: Is there an urgency to solve this problem?

Urgency is measured in customer kinetic energy.

Let’s explore two different startups: 

Startup 1 is a startup in the FinTech space. The team has recently launched their product several months ago. At the current time, the customers are spread out among various industries and geographies, registered investment advisors, hedge funds, and banks. The sales cycle is about 12 months long. The startup has an internal “champion” but the champion is inconsistency available to have a call when you want to check on the status of the customer contract. Thus, the sales cycle is around 11-12 months. At other financial institutions, your contacts tend to reschedule the meeting with you. You have a demo schedule for a Thursday and they send you an email saying, “I’m underwater. Can we reschedule when I come up for air,” with no clear time frame of follow up. 

Compare this to a real startup story: 

Startup 2 is a startup that is focused on one market. After having various conversations with customers, it had a conversation with a business owner in a particular industry. The startup sent the business owner an email about its product, and 35 seconds later, the business owner is texting the startup founder saying, “OMG can I call you? We need to meet.” Several days later, the startup meets with the business’ management team. At that meeting, the business owner says this will change the industry and that they want the startup to present at an industry conference. At the industry conference, a 30 minute talk becomes an 1.5 hour talk, and the attendees demand more time with the founding team, so they also schedule time the following day for an hour long Q&A. Verbal commitments are flying in right and left with a 90% conversion rate. 

The first example, the depth of the market problem is not clear. One of two things is happening: 1) There isn’t a hair on fire problem to be solved, or 2) There is a hair on fire problem but the solution is grossly inadequate.

However, typically when a hair on fire problem meets an inferior solution, the startup will still get a contract if dealing with the product deficiencies is better than the painful status quo. 

In the second example, the kinetic energy is obvious to anybody. The customer is moving desperately to pull in the solution which indicates the devastation that the customer and industry is facing. 

👉 That’s what you want to see! 🙌

✅ In summary, the devastation of the market problem is directly proportional to the desperation of which the customer moves to pull in the solution. 

Investors are evaluating the depth of market problem. The best way to take a mental shortcut to measure that is observing the kinetic energy that the customer moves to pull in the startups’ solution. 

In closing, the startup founder life is really hard. Life is too short to work on a market problem and solution that customers are not breaking through walls to pull into their lives. 

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