Letter From An Angel Investor To An Aspiring Founder


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By Christian Dahlen & Oana Olteanu – originally published here

Dear Jane Founder,

You, the aspiring entrepreneur, walk into my office to pitch your idea. You think that you have invented a new way to turn lead into gold. My job is to distinguish between the few great ideas and the many lousy ideas that I see day in and day out.

Let me explain: Early stage investors such as myself are willing to take on a high risk investment to achieve commensurate returns. As such, I am looking to invest in early stage founders and their startups. I am cognizant that, at this early stage, my ability to judge is complicated by a lack of product validation. A Minimum Viable Product would certainly reduce my investment risk, but it would also reduce my expected returns. And in fact, early usage, revenue, and ‘traction’ are no guarantors for later success.

In the absence of that early validation, there are four inquiries which help me assess the quality of your idea and of your thinking. Before you have even built a prototype.

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1. What problem and whose problem are you solving?

You listen to the customer, and you clearly understand the customer’s main problem and the viability of the existing solution. You know the single performance measure that is most important for the customer. ‘ Because customers don’t care about your idea. … We tend to fall in love with our ideas, but you need to test your ideas. Do your customers want your value proposition?

You have identified the customer segment with the most urgent need to have the problem solved.


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2. What is special about your idea, and how are you planning to validate it?

Having contrarian ideas is hard. I am looking for ideas that are non-consensus to produce outsize return. To quote Howard Marks: ‘To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.’ Peter Thiel is asking whether you have a secret, an important truth that very few people agree with you.

Chris Dixon has characteristized the best ideas as (a) powerful people dismiss them as toys; (b) they unbundle functions done by others; (c) they often start off as hobbies and/or (d) they often challenge social norms. Paul Graham has stated that ‘the best ideas look initially like bad ideas’.

I check my own biases for overlooking contrarian ideas by using diagnostic questionssuch as ‘Isn’t this a niche play? Is this just an ‘interesting’ investment? What do you do again? What do you want to be when you grow up?’

You have solicited as much feedback on your idea as possible. Ideas, even before you build a product, need to be tested. If an idea remains a secret it simply means that is lacking validation. Even Einstein didn’t come up with the Special Theory of Relativity all by himself.

You have identified the right user, and have talked to enough of them. You have A/B tested to target the right audience. You have confirmed that the problem to be solved is relevant and urgent for the user. You have validated the solution by understanding the user through precise observation and user feedback. You can answer Sequoia Capital’s question Why now?
You can do all of this with a simple storyboard before a single line of code is written. Y Combinator makes the team walk through every step of the idea first, and only then convert it into a product.

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3. What market are you going after?

Winning founders find great markets.

Now that you already understand your target customer, you understand the market you are in. Andy Rachleff has suggested that the market always wins: ‘When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins.’

You understand whether your idea addresses an existing market – the code words to look out for are ‘better mousetrap’ and ‘continuous innovation’ – or whether you are addressing new buying segments and are creating a new market – ‘disruptive innovation’. Understanding the category where the startup fits and who are the leaders in that category is crucial. Paul Martino from Bullpen Capital says, ‘There’s an advantage of investing in nascent markets and backing something before it becomes obvious to others.’

Your startup should introduce the customer to a new category of product or service. Ann Miura-Ko from Floodgate invests in category kings, in those startups who define their category: ‘What is the category where this fits? Is it a category worth winning? Is it a category where the startup can become king?

For existing markets, you understand the different dimensions such as: How big is the market globally? Are there any dynamics that will change it? How much of the market can you serve? How much of the market can you get?  What stops the incumbents from copying your idea? What would you do if you were competing with yourself? Y Combinator’s application is asking ‘What do you understand about your business that other companies in it just don’t get?’

Understanding the addressable market is about making choices: ‘[…] you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter.’


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4. How are you going to make money?

You have validated a price range by talking with customers. You find creative ways to prove that you deliver value to the user and can make money even before an MVP. Coin created a simple web page where people could order and pay even before Coin had a product. They reached their $50,000 pre-order goal in just 40 minutes. If your product is not web based, you have tested pricing assumptions in repeated conversations with potential customers.

Ultimately, I am asking all these questions for one reason only: What is your level of insight? It’s okay if you don’t have all the answers, but I expect that you have clearly thought about the known knowns, known unknowns, and the unknown unknowns. Only then will I listen further when you talk about traction, team, funding, product, channels, revenue and cost.

With warm regards

Your angel investors

Christian Dahlen & Oana Olteanu


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