See show notes for this episode: S 02 | Ep 39 Why Investors Aren't Buying Your Startup.
Alex: Welcome to Experience Focus Leaders. I am delighted to be joined by Sephi Shapira, a four time tech founder who's raised over 100 million and exited three startups, coached more than 100 founders worldwide to secure over a billion dollars in funding. He's built and sold companies across mobile, advertising, content, decentralized social platform, sold licenses to Apple and beyond. The founding companies he's authored Fundable why Some Entrepreneurs Get Funded and Others do not. A book that flips the fundraising dynamic so investors compete to back you. Welcome to the pod, Sephi.
Sephi Shapira: Thank you. It's a pleasure, pleasure to be here. I'm excited.
Alex: Well, listen, you've raised yourself a ton of money and then you helped raise, you help founders, sometimes founders who are not from a privileged backgrounds, for example women who sometimes are known to have a harder time, fundraising. You've helped them be massively successful and in fact we got introduced by a super successful female founder. Tell me, what are the secrets that, you know, if we, if people just stop listening to us after five minutes, which they won't. What are the few secrets that people do not follow and, and could that would make a huge difference in the way they represent their business?
Sephi Shapira: Yeah, that, that's a great question. I think fundraising is probably the most misunderstood aspect of, of entrepreneurship. there's, there's an interesting reason why this is the case. Founders, when they build a company, if, if they're good founders, they're market centric, they're customer centric and you know, building towards a specific feedback that they get from, from their users. When you're raising money, investors are not customers. They usually don't understand your market and have little interest to understand it. So instead of focusing on that, they tend to focus on the founder himself. Right, because that's the experience they have. They meet thousands of founders and they try to identify certain, traits and qualities in the founder. So I would say if I summarize it in a single sentence, is that fundability is a quality of the founder, not their startup. Which means it's more around your coherency, your mindset and how you engage with investors and less about the specific startup itself. And I think the easiest way, to prove this is that if you look at almost any successful startup, choose anyone you want, they usually succeed in something completely different than what they started. So, so the Initial thing that they did has nothing to do with what they succeeded. In some cases it's a completely different business. So therefore it's the founders themselves that's consistent through the process and not necessarily the initial idea or the initial plan that they presented to investors.
Alex: That makes a lot of sense. And the, the program and in YC once coined the term formidable founders as the kind of one of the things that investors are looking for. So let's, let's kind of dig into that. You know, what are the characteristics of these fundable formidable founders that investors have like a pattern matching on and could immediately start saying, okay, this, this feels like that perfect liar that's going to return my fund.
Sephi Shapira: Yes. I would say again, to get to the core of it, it's two things. It's clarity and energy. Right. So, so the first thing is if I don't understand what you do, I can't give you money. Okay. Okay. And most founders, make it very hard for investors to understand what they do. You really have to like pull it out of them and do the investigative work. So, so you have to be very clear about what you do. And you also have to be able to describe a vision of the future with your solution or startup in it and the impact that your startup resolution has on the future. So if you start with the world with your solution in it, and you get me to agree that this is for example, an inevitable future, that this type of solution needs to exist, right then you're beginning to persuade me now. the catch here is that if you are very clear in the way you're describing that future, you are also persuading me that you actually
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Sephi Shapira: have the energy to deliver on it. Because there's a direct relationship between the clarity of your vision and your ability to execute it. These two things are related. So you're actually persuading me in your ability to deliver through your coherency, through your clarity, and by showing me that you've thought things through and that you have the ability to go down to enough details to make things happen.
Alex: So what you're saying is the clarity is almost like, hey, this is the strategy. And if you, if you don't have the clarity even you've got a ton of energy and you're jumping around and you're doing push ups and, and answering the phone at the same time, you're probably going in, in five different directions at the same time and wasting cycles. So you can both.
Sephi Shapira: Yeah.
Alex: Is that, is that it?
Sephi Shapira: Yeah, it's correct. And it's even deeper than that because you think about it, a startup doesn't have anything. It doesn't have a product, it doesn't have a plan, it doesn't have a customer. All it has is a set of assumptions. It has a set of assumptions about reality and it needs to test these assumptions. And the way you test it is by clearly defining, you know, the iteration system towards, you know, a product market fit. What we call a product market fit simply means that your assumptions correspond with reality. And if you're, you're portraying clarity and you're, and you're showing me how you're going to test these assumptions, I'm less concerned with these assumptions being correct and I'm more concerned with your ability to continue to iterate until your assumptions are correct. Because your assumptions are wrong initially, you need to find the right solution. And that's really what a startup is. And that's also the objective of a startup's plan is to iterate towards a product market fit through a series of testing assumptions. It's kind of like a scientific method until your assumptions correspond with reality and then you actually have a business.
Alex: By the way, just as a public service announcement to our audience, I, think in this age of AI, you know, every knowledge worker, which the term is not no longer as relevant thanks to AI, you're effectively your career as a startup right now. Right. So I think this is, we need to take this conversation and extrapolate a bit of this because I think so much is going up in this transition that you know, everybody needs to function in the, in sort of like how do I reinvent my, my function, my role, my career in this era and operate a lot more like a founder, than, than used to be, you know, common. Right. Just given the volume of transition, the given of the need to be resilient, the vast changes that we expect to happen, that is minor reflection of what has already happened in some industries. I think this is why I think, Steffi, I'm really excited to bring you because almost everybody in the, you know, now needs to bring that DNA of like everything is changing. We have a vision of what my role could be or what like a new opportunity for the business could be. And so how do I pitch it? the way a startup founder would. And I think often what you bring is at legacy knowledge or the kind of, the legacy advantages are no longer there because AI is just kind of wiping the board clean of what has worked in the past is not necessarily what's going to work in the future. So I don't know what your reactions are to that, but I think I'm curious because you speak to founders and other humans, right? Like, is everybody in your view? Like, what, what are the, what are some of the characteristics that founders bring to the table? The successful founders that are universal to any professional?
Sephi Shapira: Yeah, I think, I think you really hit the nail on the head. I completely agree. I think one of the best systematic ways to learn and improve in general is to make certain predictions. Say I believe this is going to happen or this will be the outcome, and then check how these predictions correspond with reality and tune your intuition. I think this is true for anything. This is true for relationships. This is true for, you know, for making career decisions. This is true for anything. Because humans use intuition a lot. Intuition is based on knowledge. It's not a feeling. It's based on, on knowledge. And sometimes our intuition is greatly mistaken. Some of the biggest mistakes that we make in our life is, you know, we choose to have the wrong people in our life or we choose the wrong direction because at that moment, you know, we thought it was the right thing. But we don't always learn from these mistakes. And sometimes there, there's repeated patterns. And if you look, if you think about your life and you think about the people who are the least fortunate in your life in your immediate circle, you will see a, common
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Sephi Shapira: trait that they tend to repeat patterns that don't work and they tend not to learn from these patterns. And one of the reasons is they rationalize the lack of success in their behavior through some explanation. They refuse to admit that their prediction didn't, happen as projected. They refused to admit that, yeah, I thought this person would be the right person for me. Ended up not being the wrong person. But there's nothing wrong with the way I choose people. So I'm just going to go to the next person. Right. For example. So I think that's a general statement. I think it's true for, for many areas in life.
Alex: So, so this is, this is kind of wired in our, in our psychology. Like behavioral psychologists have a term called commitment and consistency. Sort of like I make a commitment, therefore it over time becomes part of my self identity. And I don't want to deny that identity. And so I just kind of keep buggering on. Or you, know, is that like, is the, so this is sort of blind spots that we, we have?
Sephi Shapira: Yeah. In general, yes. There's other aspects like functional fixedness and psychology where I just get stuck with a Certain frame. And I can't release myself from that frame because I think naturally our brain learns, but it tends to learn in a, very holistic way, which means it incorporates many aspects of our life into the learning. And it's hard for it to be more scientific and to separate and, you know, encapsulate a certain phenomena separated from the environment and say, let's just look at what happened in this specific case and try to find a pattern. This is why science is so precise, because science, you know, does a lab experiment, reduces all the noise, and says, let's just focus on this specific phenomena. And I think for us, it's very hard to do that in our life. That's why we tend not to make, clear, measurable predictions before we make decisions. We just think it's going to work out. What do you mean it's going to work out? it'll be okay. And then when things don't succeed, there's no clear definition of success and failure. And therefore it's hard for us to learn about specific behaviors. We tend to, what worked everything together.
Alex: Because basically there's a lot of noise around certain decisions. We tend to not work as hard as a scientist would in isolating empirical evidence. And therefore we just keep repeating the same, you know, patterns that work. And I think when we were chatting earlier, you brought it up like, and I was saying, well, what are these obvious things that everybody doesn't do that are secrets? It's like. Yeah, they're not, secrets, Alex. Yeah, yeah, actually, like, empirically proven not to work, and we just don't measure them. Right. So, like, maybe get back to that.
Sephi Shapira: Yeah. Let's take an example that really, resonates with everyone, which is toxic relationships. Okay. We all know that we have people in our life that we probably shouldn't have in our life. And this, by the way, is true for personal life. It's also true with, with investors and business partners and co founders. Right. But. But even though things don't work, and I think you think even about your career, I think one of the most common mistakes is giving people too many chances to think about, you know, you know, it's not the right time. Let's just wait a bit. And things never get better, right? They never get better. So. So that's a mistake that's very common. But why is it so hard for us to just say, no, this, this shouldn't be this way? It's not working to set borders and just to cut things. It's just true for for personal life. It's true with investors, it's true with business partners. I think that one of the reason is the holistic view. We, we incorporate many things into it. Oh, more empathy and to give more chances. And I'm also, you know, helping the other person. So in our brain, it's not easy for us to say, this is not working, it's not going anywhere. That's it. Right. We tend to bundle a lot of things together and then the decision becomes harder. And even though at the end of the, day, you know, we finally reach the correct decision, it takes a lot of time and cause it causes a lot of damage. And in the context.
Alex: And sometimes you don't actively let, like I've noticed in myself and you know, just to raise my hands, you know, that as, as you're saying this, I'm like, oh, yeah, that was me. so, so sometimes you, the, the stuff happens to you versus you actively making the decision. So you kind of like. And it takes extra, months of some kind of imperfection, because. Because of this delay factor. So eventually it still ends up being kind of leading to a negative outcome of some kind. You just lose, you just lose time, because you're not proactively evaluating effectiveness of, of certain things. Is that, is that.
Sephi Shapira: Yeah, I think so. I think probably if you think about people around you and also yourself, probably the most damaging, type of mistake is having the wrong people in your life. I don't think there's anything
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Sephi Shapira: more damaging if you look at your life than, than that over time. Right. Because it destroys everything. But we tend, we all tend to do it. We tend to do it. You know, I write a lot about, in my book about the nature of the relationship with an investor. When an investor kind of mistreats you, doesn't pay attention to you, goes to you, and you kind of tolerate that because you think it's just part of the relationship. It isn't. You're just sending them, a message to the other person that it's okay to behave this way. And one of the things I find really fascinating. Ah. And it's kind of trivial when you think about it, but it's. But many people don't, don't see it this way, is that the way people treat you is your responsibility. So if somebody is mistreating you or misbehaving towards you or speaking to you in a way you don't like, it's your responsibility that he's acting this way. It's not his responsibility. It's your job to set these type of borders. And I think this is something that, that it kind of makes a lot of sense, but it's very counterintuitive. So people externalize responsibility. They say, oh, what can I do? This is how the ecosystem is. This is just how investors are, or these are how, you know, partners are.
Alex: Right.
Sephi Shapira: It's not true. It's you. You are responsible for everything that happens to you. You know, you're the captain of the ship.
Alex: Right.
Sephi Shapira: And you need to take control of these things. Yeah.
Alex: I was just rereading a book, on, you know, it's. Conscious leadership is sort of the theme. And there's. There's a book and it's basically like, has this, terminology of above the line where you take full responsibility for your life, or below the line where you're kind of a victim or people do this, or you're not even aware of what's going on and you're acting out. And, and so the whole premise is that you're basically taking full ownership, of your, of whatever happens. And you know, you. You're like, it's. It's really empowering. And I think oftentimes as you. You picked it up, the. For whatever reason, maybe it's the press that we have about investors or the press that we have about sales in general, it's that like, customer, skiing investor is king. You're trying to prove yourself to the investor. And yeah, to some degree there's elements of that in any relationship, but I think it's kind of gone the. To the extreme level where you've sort of given these godlike powers to just some dudes, you know, dudettes that, you know, graduated from Stanford a couple of years ago and like, you know, have. Have, landed a job and. And you know, read. Read Twitter and kind of regurgitate whatever is there. Right. Like, so. So there's this a little bit of a, You, know, for investors, like entrepreneurs treat them a little bit with too much, respect almost. And in parallel for, for customers, there is.
Sephi Shapira: There is this.
Alex: We forget the notion that you need to select the right customers for your business.
Sephi Shapira: Sure, sure. Yeah. I, I think.
Alex: I think it's.
Sephi Shapira: It's one of the most interesting topics in society today is. Is this concept of agency. Right. Like how much control you actually have over your life and how much of it is defined by. So.
Alex: So yes, on the society level.
Sephi Shapira: Yeah. So I think one of the most interesting, topics for discussion today is this Concept of agency. Yeah, right. How much control I have over my life and how much is forced on me. So there's a new paradigm that's become very popular which is this oppressor, oppressed paradigm.
Alex: Right.
Sephi Shapira: Where anyone that's not in a position of power was effectively put there by other people and has very little control over his ability to move into a position of power. Now of course the data doesn't support this. The United States for example, has the highest social mobility in the world by far. A lot of these people that are considered problematic, very wealthy people are self made people that started from nothing. But this really propagates this concept of what we call the victim mentality. Right M. Where there's nothing I can do, as the Italians say. The Italians have a joke that there's three ways to make money. You can inherited, you can marry it or you can steal it. That's basically three options, right? There's no concept, of creating wealth through adding value. It's a joke. But it's actually become quite a mainstream view, especially in the western society. And I think there's this opposite concept called the victor mentality. Not a victim mentality, but a victor mentality. And I really think that the fundamental shift between the victim mentality and the victor mentality is stopping to externalize responsibility and saying, no, it's on me to fix it. Sure there's inequalities in the world, sure there's some level of oppression, but that's just how the world is. And I have to, despite these challenges, I have to take
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Sephi Shapira: responsibility, ah, for my life. And that's a very big shift in thinking that really affects every aspect of your life. Yeah.
Alex: Love it. So, so entrepreneurs need to take on victor mentality. They need to empower their teams to do the same thing. What is it? What do you feel are the traps that entrepreneurs fall into that kind of gets them into that you know, depressed mode. And it probably doesn't happen naturally. I think naturally. Anybody drawn to this world of like doing something, starting something is motivated, is driven. But eventually, right, they get beaten left, beaten right. They like all the demons come up. maybe they don't take care of themselves. You can have written about that. And then they start the voice, the, the weaker part of their nature kind of starts popping up. And we see examples of people getting depressed and you know, as bad as suicides that are mean from, from actually the group that tends, you know, the movers and the shaker so it's kind of a real tragedy to some degree that the people that have the potency to really have very positive impact in the world are, kind of slowing down and not living up to their potential. So what are your, what is the pattern match that you've, you've seen around that and what can we do about it?
Sephi Shapira: Sure. So I want to address two aspects of this. First of all, as everyone knows, building a company is one of the hardest things you'll ever do in your life. I always give an analogy. It's like jumping off an airplane and trying to find that lever that opens the parachute. You know, as you see the earth coming at you and you're trying to figure out how to open the parachute, which by the way, will only slow, you down. Unless there's a gust of wind, you're still going to hit the ground. Right. But the vast majority of startups fail and it's a gruesome, extremely difficult, process. So one of the things that the people don't talk enough about is, you know, the environmental, constraints and the physical constraints on entrepreneurship. So there's this concept now that's floating around in, Silicon Valley called Founder Mode. Founder Mode, which is, you know, being involved in every aspect of your business and kind of modeling like after Elon Musk, you know, where you're the expert of your company and you're involved in everything and doing everything, which of course is very strainful, requires an infinite amount, amount of work. Thing that people don't talk enough about is the opposite side, is that we are not angels. We are biological creatures and we have, physical, constraints. If we don't, sleep enough, if we don't eat well, if we consume, you know, narcotics or alcohol, if we don't do enough sports, if we have
Alex: coffee in our blood, does that count?
Sephi Shapira: That's a plug for WeWork.
Alex: Plug for we, for coffee.
Sephi Shapira: Yeah. I hope they're, I hope they're paying you something for that. and, and And if we, and if we have in our life people, that don't want the best for us and are not and are not supportive, we're going to fail. That's it. So I think, you know, it's true, by the way, for everything. I mean, most people that suffer from depression, if you actually have a conversation for them with them, you'll find an environmental factor that's causing their depression, that if you remove that from their life, they'll be happy. But instead you plug them with, Antidepressant medication. And it's the same with the founder. I think that in the vast majority of cases, if you look at founders that are unhappy or struggling or suffering, it's not because of their company. It's something in the environment that's causing this. I coined the term, to be the opposite of, founder mode. I call it blunder mode. Blunder mode is when you are not handling these environmental points that you just commit blunder under after blunder and working harder, in essence is this vicious circle. It just makes you, you know, it just makes the situation worse and worse because you're not addressing the core issue. And you think the stress is coming from your company, from not being able to raise money or not having customers, but it isn't. It's coming from your body just being in a situation where you just can't function under the level of stress that's, that's required.
Alex: So speaking of Victor, there's a gentleman by the name Viktor Frankl who's survived, Auschwitz, written a book called Man's Search for Meaning, which I think is really kind of m. You're connecting the dots for me is like, you're, Even when your environment is total, which it was in his case, there's still a way in which you could reinterpret that environment and empower yourself, to succeed, you know, to achieve your kind of, your. Your goals. And so I think the. That's back to, okay, we could change the environment. Obviously we have. We have a lot more control. But. But I think it's. It's up to us to.
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Alex: To the way we process what's going on externally, to take that responsibility and make the most, you know, of the. Of the lemons that we're given, whether it's, know, Limon just to go with Italy, whether it's limoncello or. Or. Or lemon cake, you know, make. Make the most of it. Is that. Am I getting that right? Se.
Sephi Shapira: Yeah, I think I think you're getting it right. I think I would add to that that the frame you bring into the situation actually defines if you perceive these things as, lemons or oranges.
Alex: Right? Yeah.
Sephi Shapira: I think reality, you know, is not objective that way. It really. It's really about how you. You interpret it. Right? So. So if you're challenged and you. You put into a different position and you think, good, that's good that it happened to me, because this is an opportunity to grow and to learn, then suddenly it's not that you need to deal with this challenge, you have an opportunity for growth. So just looking at things in that framework shifts, you know, your, your state of mind when we talk, to talk, about fundraising, which is again, my, my bread and butter. Right. I think coming to an investor in the mindset that, you know, this is a challenge to persuade them that they should give you money. I think that's a strong, that that's dead on arrival. I think that's, that's the, the wrong framework. I think you come in with the framework that I'm gifting them an opportunity that I hope they can see, they can identify. I always give this very simple analogy which, which is very, it's a, it's a high simplification. But imagine right now that I see a hundred dollar bill, like just behind you on the floor. I just see it on the video and I tell you, you know, hey, Alex, look behind you. There's a hundred dollar bill on the floor. Once you pick it up and then you, you look behind you and you can't see it. And you tell me, like, I can't see the bill. I'm like, it's right there, you know, next to the drawer. And just tell me, I can't see it. And then what I feel for you is empathy. I'm like, oh my God, the guy can't see this hundred dollar bill, can't pick it up off the floor. You, know, I feel empathy for you. I'm not going to get upset with you. Right. I think when you're pitching a company, that's kind of how you have to pitch it. Like if the investor doesn't see the opportunity, you, you see it, you see the opportunity. You see the hundred dollar bill. If you're a rational player and it's a real opportunity, if they don't see it and they don't understand it, shouldn't get upset or offended. You should just say, you know, I'm sorry you can't see it and, and move on to the next thing. Right. So I think frame is everything in these type of situations. Right. Even in your lemon analogy, are you sure they're lemons? Are you sure they're not oranges? You know, so, yeah, they're, they're a different fruit, you know, so one of
Alex: the things that, as founders we, we deal with, especially as founders that have the ability to bootstrap the company, which I think is the best way to raise investment, you know, is my philosophy is not to need it. Right. Probably you would agree with that. But I think you have constraint, you do have real constraint on time, right? Like there is a, there, you know, you could spend your time, you know, selling to customers or partners or building something, you know, tremendous. Or you could spend your time honing your investor message and then getting a good introduction to an investor, which is like a whole kabuki theater. That it does matter to some degree, you know, that. But it's, but it's, it's time. It's mental time. It's it's something that, you know, you're not pursuing your other strategies. And I wonder, you know, how do you incorporate that time if you do decide to go down the investment route, how do you incorporate that time in the way that you mentally shift that this is not, you know, to some degree a waste of time. Right? Because you still have like right now other options on the table. Maybe they slightly different strategy and slightly different growth trajectory. But that's sort of the, the for folks like, like for many serial founders, or, or folks that want to have more control, like, you have two advantages. One is like, okay, investors, you know, sometimes you get them a little too early in the journey or the wrong investors, like you said, and then, you know, that causes its own problems. But even if they're perfect investors, but they still take, you know, 20, 30, 40% of your time in a particular period of your, your fundraise, of your business journey. How do you make sure that's either minimized or you, you make the most of that time.
Sephi Shapira: Sure. So I've had the privilege to work with a few unicorn companies from seed stage until they, when they hit unicorn status. And I reflected a lot about what, what did I see really early on in their life cycle that was different than other companies that didn't reach this success. And what I noticed is two specific things. One is directly related to what we're talking about. The first thing which is not related is I saw the organic creation of communities of users
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Sephi Shapira: around products. The products love the users, love the product so much they created communities, they started to promote it. They really, they created like certain fan club around these products in an organic way. The second thing which is directly related to focus and time, which again, time is the only real resource. Yeah, you can't buy it, you can't scale it. Everyone knows that. The second thing is that I heard from the founders, this went better than we expected. Consistently. Consistently. We launched a new feature. It went better than we expected. We met an investor. It went better than we Expected, with other startups, everything is a struggle. Everything is a struggle, everything doesn't work. You have to iterate 100 times to find the solution. With these unicorns, it just seemed like there was some kind of force, some kind of guiding hand that really made things work in a way. Their problem was that too much traffic, so the servers crashed, too much demand, so it's our customer support. Too many investors chasing after me. So, so I think there's this there's this concept in Chinese philosophy, it's called U, which translated into English is don't force it. Okay. And there's this certain balance between pushing and this, this pull that you feel, right. And when you're heading in the right direction, you just feel like this constant pull from whatever it is that you're doing that's, that's, that's pulling you into the direction you want to go. And if you feel that everything is pushing back all the time, then that's probably not a good, place to spend your time. I would say that's a general kind of high level guideline to know what to spend time on and don't, don't, you should, you shouldn't force it too much. Nothing is working. Then maybe it's time to take a step back and think, you know, am m I digging in the right place? You know, I would say that.
Alex: I see. So you, you need to find areas where you're not just kind of keep hammering into the same spot in the wall. But you could, you could see, okay, is there, what are the areas where there is success and, and try to
Sephi Shapira: give you a specific example. I'll give a specific example. This is not mine. This is from Reid Hoffman that if you're not ashamed with the first version of the product you launched, you launched too late. But why, And I think this is directly related to what we're talking about and also greatly misunderstood. When you have product market fit users will take a ton of pain to get access to your product. Okay, I'll give you a specific example. The first viral service I ever launched many years ago, it was a service called Please Call Me. We launched it In Thailand where 66% of phones have no credit at any given time. Back at that time. So I mean two thirds of users, their phone was only good on receiving calls, was basically dead. And we launched a service that you could send a text message from this dead phone to ask someone to call you back. So it revives your phone. Suddenly your phone can, can initiate conversation and we got something like 60% market share, you know, the whole market. Basically everyone used it and it was, it was so successful that our servers crashed and it took us a week to re, reorganize, the servers. The day we launched we had more usage than the day before we crashed. Think about it. So for one week the service was down and then users were constantly trying to use it every day and when it came back they immediately started using it. This is a form of product, market fit. When you're launching very early, even if your product is not good and full of bugs, if the users keep coming back. Right. More than you expect, this is a strong indication that you really have something they need. That's, I think one of the major reasons why you should launch early. To identify the pull from the market.
Alex: So, so let's double click on this. Right. Obviously there is the consumer products where you know, when you hit it, you hit it, you feel it. Like I think the velocity is faster and then there's the enterprise type of products. Right. And I think there's still the same dynamic. But I would, I'd love for you to clarify that because sometimes there's the, this, the buying cycles are still, they are what they are. And yes, people could make exceptions in desperate times for it was credit cards, but generally that, that is limited. Ah. you know what, have you seen that that allows for, for more B2B kind of vibe of this kind of pool where it's, it's not as kind of as immediate I think gratification as some other consumer premium businesses.
Sephi Shapira: Sure. So, so there's a lot of discussion especially with, with B2B startups, everyone talks about total addressable market, serviceable market. I think there's not enough conversation about what I like to call the initial addressable market, which is M, which is what is the, the the smallest possible vertical of users that can adopt your product
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Sephi Shapira: and that they have to have three traits which is they need to be able to move quick. Right. Your startup, you don't have a, time for one year sales cycle. They need to have money to spend. And then finally they need what I like to call dilated pupils, which means when they see your product they're like, oh my God, yeah, I must have this specifically. I, you know, if I adopt this and my competitors won't, they won't be able to compete with me. That's really the magic. You're looking for something that is not an optimization solution, but providing them a new capability that will change the dynamics so much that you know, they'll be able to either change the level of service or the way they price their, their, their product so that they'll, they'll beat their competition. I think that's how successful SaaS companies win. Right. The most common mistake I see with SaaS companies, which is true for D2C as well, is they compare themselves to like a 10 or 20 year old company and they try to become on day one, better version for everyone and they forget what these successful companies looked like when they were six months old. Right. It's too much functionality and there's really no such thing as a, functionality that's too narrow as long as users are willing to pay for it. You almost want to find the least amount of functionality that triggers a willingness to pay. And that's where you want to live initially. Right. And, and that requires both a vertical, you know, identification of a vertical application, but also a vertical market. And go as narrow as possible. Right. And provide them something that's really a game changer, that's a life or death feature for them. And you'd be surprised in almost all instances if you think about it long enough, it's possible to narrow it down that level. But it's just very counterintuitive.
Alex: It's actually very timely. So I'm on the podcast recording day today and I'm chatting with Chris Lockhead who's written about category design. one of his famous book is Play Bigger. And I think you've also spoken about designing your category as a startup and potentially even earlier stage, versions. Because I think category design, if you already got a bunch of venture money and you're trying to create a beautiful new positioning around yourself makes a ton of sense. I think it's a bit harder to go and say hey, we're this new category and nobody has heard about this category doesn't exist in Google.
Sephi Shapira: Ah.
Alex: And customers don't know what it means. so if you're earlier stage company, right, and you found this, let's say there is this niche but you want to kind of position that this is leading to a broader category that will appeal to investors and you know, maybe customers and seeing that you have a bigger, bigger solution for them over time, how do you kind of balance the lack of resources? Today was this big vision.
Sephi Shapira: sure.
Alex: Tomorrow.
Sephi Shapira: So I think so I think you want really the narrowest possible go to market and the largest possible vision.
Alex: Right.
Sephi Shapira: And it's always there's two things that I think worth Worth remembering. One is our intuition as product users is by using very mature products, we use very mature products of, you know, very successful large companies. We very rarely use product when they just launch. So our intuition and how we think about products is. Is catered towards very mature interfaces. Right. And the other is. And that. And that's wrong. When we're building a company, we can't build, you know, an interface like a company that's, that's, 10 or 20 or 20 years old. The second is the user, the customer is overwhelmed. They're overwhelmed with, you know, so many options, so many solutions. But in this, chaos, they have only a couple of things that are really bothering them that are really like, on a daily basis just sitting on them, and they're struggling with. Right. And if you identify those things that are bothering them and you offer them solutions, you rise above the noise. This is the signal to noise ratio.
Alex: Right.
Sephi Shapira: And the way I like to address category creation is first through identifying that specific need of the customer in the noise. Like that one thing, that humming in that. In your ear, that buzzing in your ear that's constantly there and trying to address that, and then build my whole narrative around that specific need. Later I can tell the story of how I scale it to a larger vision.
Alex: But really, it has nothing to do with your product is basically what you're saying to begin with your product.
Sephi Shapira: Right.
Alex: It has nothing. It has something to do with a, customer group, obviously, and their language.
Sephi Shapira: Right? Yes. The simplest way to describe it is that the value of your product has nothing to do with what you put into it, with your effort. Nothing
00:40:00
Sephi Shapira: to do. You can invest all the money you want into it and put pants. That doesn't create value. The value of your product comes only from one source. What the customer extracts from it, that's it. That's what defines the value. Now, we can't avoid to feel that if we've invested a lot of effort and written a lot of code and invest a lot of money into something, it must have value. It's not true. It's not true. There's plenty of examples. I can quote examples of companies that invested billions into product and just went out of business. They didn't have any customers. So I, think it's not so much about having a category. There's no. That nobody's heard of. It's about being able to very clearly describe a pain point that you're, that you're solving in a way that nobody's done before and then just Lead with that. Just focus all of your energy and that specific thing, right? And just reiterate it over and over again. And then from there, of course, you can scale into other things. It's like the umbrella strategy. You know, you put the umbrella in first and you open it while it's inside, right? You scale your vision. So I think that's very counterintuitive and it's primarily caused by what we discussed earlier, that our intuition as product users is built on very mature companies that have a lot of functionality. And we have no experience with how these companies launched and how their product felt like when it was, you know, six months or a year old.
Alex: Well, one of the things that really struck me when we were redesigning and redefining our category when I was at SuccessFactors, which had like a really long journey, is that we've had, different times, different ways in which we positioned our category right. And it started still relatively narrow and then just kept expending, expanding as the company grew. And then as an outsiders, to your point, we kind of now look at, you know, we read some investor, investor research and other things and we kind of look at the, retroactively at the stuff and it's all this big mega categories that, that we come up with. So how do you, do, do you think this is just a, kind
Sephi Shapira: of a curve, right?
Alex: Like, and you kind of, hey, I'm going for this category now. And then I'm expanding and I'm expanding and Yes, I have 100 year vision and 20 year vision, but you know, sometimes I need to connect it to where we are right now so that the customers understand what we're talking about. Is that
Sephi Shapira: the way I like to look at it is again, first of all, separate between your go to market and your vision. So your go to market is, is different than your category. Your go to market is, is how you enter the market. And, and that should be by identifying the ideal customers and the ideal initial functionality. Your vision, is much bigger than that. Your vision, if you're talking to a venture capital firm, they need to see, a total addressable market of over 20 billion. anything under that is irrelevant to them and the bigger, the better. The second thing is be able to tell the story of how you scale from just selling books to selling everything, right? That's like connected as a natural evolution and progression. And the way to do that is to think about the core attributes of your product, what you're offering to your customer, and what's not going to Change over time. Like that your core premise, the technology might change, the devices might change, but that the problem you're solving for your customer, this need will persist and that you have, and that the way you're addressing it will persist. The changes of, both scaling into larger, sectors and also over time. I think that's really what investors want to hear. But that said, most companies never make it through phase one. They never capture, capture the initial market. They die because they go too wide too early. They try to be everything to everyone and they try to be better than the bigger players. So I think very few companies struggle with the expansion after acquiring, you know, 10, 20, 30, $100 million revenue in their initial segment. Most companies die because they don't have enough focus. They try to go too wide too early because again, they're building their intuition around successful companies that are 20 years old and they're trying to mimic them. And I think that's one of the biggest, mistakes we're launching.
Alex: How does AI world, where theory, it's easier to build everything, right? Both in terms of, velocity of building something to test and the volume. Hey, I could go and, you know, build out a huge, you know, huge product quickly. You know, let's see, the quality is not quite guaranteed, but like, I think this kind of feeling of like, oh my God, I can't go build this massive solution to become all in one,
00:45:00
Alex: alternative for my, let's say, niche customer segment, right? Like, I could go and build a lot more, a lot faster. in theory breaks some of the constraints that we've been talking about, right? Like, is that your observation or is it like, it's still like, there's no fundamental change?
Sephi Shapira: I think there's a fundamental change in two areas. I think AI is greatly misunderstood. I like the analogy that it's like a toddler with superpowers, right. I think AI cannot automate full businesses at this stage, at least generative AI and cannot build full products. I think the two major paradigm shifts that are happening right now are, one, it demands you to be much more coherent, much quicker, right? Because when you work with a system that can really build code really quickly, you're not spending a lot of time on coding. And then you start to realize very quickly, oh, yeah, I didn't think things through, right? Because, because it's building stuff and it's filling in the gaps and that's not how you want it to do what it, what it wants to do. So it makes you, it forces you to be Much more coherent, much clearer and to be much more detail oriented on what you actually want to do. We have this joke, my background is in math and computer science. We had this joke in university. But the problem with computers is they do what you tell them to do, not what you want them to do. That's the problem. Right? And that's a problem with AI. It does what you tell it to do and it fills in the gap. So I think that's really good. That's why I encourage building quickly with as many tools just to get to the level of coherency. The second is it really enables you to test with customers much quicker. You can build prototypes and put them in front of customers and sometimes they're just dead on arrival. Like they just see it and they're like it doesn't work for me. They don't even need to use it. So it gets you closer to the customer quicker. And I think that that's probably the biggest opportunity is to build something very, very quickly, put it in front of customers and then build in public, build together with the customer and not be afraid to launch products that are, you know, not fully cooked because again the market pull wins everything. The market pull wins everything. The customer telling you like I really need this. You're working on the right problem. Maybe it can be done in a different way and getting, getting that whole energy that's you know, that's the force that's going to, you know, drive your company into success. So I'd say those are the two areas.
Alex: So what would be your advice?
Sephi Shapira: And you know we could, you know,
Alex: we've been chatting a little bit about this for, for, for someone like us at relate to where a lot of our customers are in regulated industries or functions like hr, or kind of benefit advisors that are, that are regulated, they have licenses, they they need to get the information 100% right. they still have a lot of pain around explaining how this regulated content materials, you know, connect the dots with their audience. But they can't go and just kind of experiment with everything. Their, the vibe coding introduces a lot of risks to them because they have to get things 100% right. And this is like half, more than half of our economy. Right? That's still that, that is not like you know, startups that are kind of just, just going and experimenting but that, that half of the economy has a huge amount of opportunities on how they could streamline their operations. What, what should they be thinking about as as they think about their careers or adopting vendors, you know, it's what we should be thinking and serving them, this community better.
Sephi Shapira: So I think the way you framed your question really encapsulates the answer. If you think about how you asked your question, you spent about 80% of the time talking about the constraints and the problems in this space. And then you ended by saying there's opportunities. I would flip that. I would spend 80% of the time clarifying in as much detail as possible what the specific opportunities are. Right. Per customer. And then to say, sure, there's constraints, there's some constraints, right, but, but by shifting to the prize, because, you know, necessity is the mother of invention. Ah. As we like to say, right. By shifting to the prize and the opportunity, then you're giving the energy to say like, we'll figure this out. But if it's not clear exactly what the opportunity is, not just high level numbers, like specifically I can see the opportunity, then yes, I'm not going to have the energy to deal with all this with all these constraints. So I would say focus your attention on really
00:50:00
Sephi Shapira: clearly describing the benefit in a way that I can connect the dot and I can see it, right. And then once I see it, then just say, okay, here are the things we need to get through. But I think right now, and this is natural, right? You're, you're focusing on where you're struggling, you're focusing on where you're, where you're exerting energy because that's where your operational brain is going towards.
Alex: Right?
Sephi Shapira: But that's not where the energy to innovate comes from. The energy to innovate comes from the prize at the end of the struggle, right? So, so that's where you basically need
Alex: to increase the size of the prize, the motivation, yeah, the, like, here's why we need to change, you know, and I think sometimes that could still be fear driven, right? Like, because like, if we don't change, our competitors might and we might lose our business or, but it still needs to be value. Yeah, value at the end of it, right.
Sephi Shapira: Like, and I'll quote here one of my favorite writers of all time, Peter Drucker, which defines the difference between management and leadership, which I think is exactly what we're talking about. And he says it in a beautiful way. He says that, leadership is doing the right things and management is doing things. Right, right. So, so you start with leadership to make sure that you're digging in the right place. And if you tell me there's oil there and a lot of oil and then you tell me you need to dig a kilometer. I'm fine. I'll find a way to dig. But if I'm not sure that there's oil there, I'm going to lose my motivation to dig very quickly, you know?
Alex: So beautiful.
Sephi Shapira: Yeah. So.
Alex: Well, I'm very motivated, if I'm a, ah, listener to this podcast, to get your book and get more of your, sharp thinking on, on these life and venture topics. Safi, where can people find you? and can I follow your work?
Sephi Shapira: Yeah, so I, I have a website, just my name, sephyshipira.com that has the link to my book and I also have a free online course on fundraising and I post there once in a while, so that's the best, place, to find me. And also on LinkedIn, you can find me on LinkedIn. Reach out. I'm always happy to have a conversation.
Alex: Brilliant. Safi, thanks so much for sharing your nuggets with us. it's been, it's been fun and I, I tend to interview people that I find fascinating who have sharp insights and, this for me is a privilege to dig into this topic with you. So thank you for.
Sephi Shapira: Thank you.
Alex: It was great, enlightening me and our audience.
Sephi Shapira: Thank you.