Secret sauce: demystifying the venture builder approach to company creation
By: Paul Goodhind, Chief Strategy Officer, Kamet Ventures
Clearing the bar
When we analyse opportunity spaces within industries, we look for ideas with the potential to dramatically improve on existing solutions’ ratio of value delivered to price paid. In an ideal situation we like to double the value delivered to the user while at least halving the cost — although this is admittedly a stretch objective and not always possible.
Identifying ideas with that kind of potential isn’t easy. It generally takes us about six months to narrow a longlist down to one idea that we have enough confidence in to take to market. This initial process is divided into two stages: a short screening phase comprising mostly desk-based research, and a longer design stage. We try to kill weak ideas during these two initial phases before moving to a third stage — the build or MVP stage. Once we start to build a venture the scale of investment increases significantly, so we need to be quite sure at this stage that the idea has legs. We have five main initial criteria, with the bar for meeting them rising higher and higher as we sort the wheat from the chaff:
Is the problem being solved a big one? Does solving it really matter to the people or companies that experience it?
2. Is the proposed solution disruptive, but also technically feasible?
3. Is the proposed solution sufficiently different from what exists already?
4. Is the market opportunity big enough? Great solutions to big problems for a small audience might make for good businesses, but not the billion-dollar (or at least hundreds of millions) companies we aim to create.
5. Is there a feasible go-to-market strategy? The best solution in the world will achieve nothing without a viable way of putting it into users’ hands.
Kill your darlings
Around 70 per cent of ideas fall down in the first screening phase of our process, as desk research makes clear they will fail to meet at least one of the five criteria. Of those that pass that initial test, many will be eliminated following customer research during the design stage. When we test ideas with prospective users, we’re looking for two things to be true: first, that customers agree the proposed solution solves a problem for them; second, that they would also be prepared to pay for it. This stage often reveals disparities between our perception of the utility of a solution and the intended user’s, and there’s no point pursuing a solution — even an effective one — that customers don’t value sufficiently to pay for at a level that would make a business economically viable.
While technical feasibility is a factor in the initial sift, it really comes into play in the design phase since we need to be sure that our ideal solution can be delivered in the real world. If it can’t, the idea has to die.
Right place, wrong time
Ideas that get discarded at the design stage aren’t necessarily bad. They might just have come along at the wrong time. In this situation, you can wait for the market, the economics, or the regulator to catch up, or you can initially pursue a different — possibly lesser — idea as a springboard to achieving what you really want to later.
This is particularly common in healthcare, where the most disruptive and high-impact ideas improve clinical outcomes by transforming treatment pathways or the patient experience. Those ideas require access to a large amount of data, which it takes some time to accumulate. A simpler idea delivering some initial value — typically cost reduction through increased process efficiency — can act as a “Trojan horse” and a foundation on which to build a more disruptive proposition over the longer-term.
Finding a face that fits
Of course, the right idea is only one component of a successful business. The other is the right founder. What “right” looks like will depend to an extent on the type of business. Some will require a founder — or at least someone within the leadership team — with a high degree of specialist domain knowledge or experience. But across the board entrepreneurs working with venture builders need to be pragmatic and intellectually nimble — the dogmatic visionary of entrepreneurship cliché is the worst possible fit.
We generally bring entrepreneurs on board later in the development of a business, when changes in direction or focus will be minor — though it might be earlier if a high level of domain expertise is needed to help shape the idea in the first place — but they still need to be open to taking a rigorously evidence-based approach rather than being driven by emotional attachment to “their” specific idea.
The proof of the pudding is in the eating
There are two ways to measure the value generated by a venture builder. First, you could look at “big wins”. This is how VCs rate themselves — do their small number of really successful investments deliver sufficient returns to more than cover those that merely break even, or that fail entirely? Venture builders can be judged similarly — but the reality is that big wins can take up to 10 years to become evident and are as much a product of how well leadership teams execute once the business is in their hands as they are of the original business design.
Perhaps a more relevant metric for a venture builder is how it raises the floor for the companies it creates. It’s generally accepted that around 80 per cent of startups fail. We’ve flipped that on its head, with 80 per cent of ventures we have launched to date going to secure at least Series A funding. This alone demonstrates substantial value-add.
Venture building’s “secret sauce” — the rigorously scientific approach to ideation, combined with recruiting a very particular type of entrepreneur — works. Startups born in venture builders enter the market better equipped to succeed than most. Kamet has already shown that it can dramatically reduce the failure rate, and while we haven’t quite been operating long enough to see many “big wins” come to fruition, we are confident for the future!