You don’t raise venture capital to play it “safe”
Yesterday, I was on a pitch call with a consumer brand creating a niche in a mass-market commodity with strong incumbents. Their legacy product-buying customers are looking for a change. The founder understood the space well, he made a good differentiation with his product positioning, and I liked his overall approach to entice the aspirational customers in his target market to upgrade from the run-of-the-mill offerings.
Where his pitch fell flat was in offering his product at a 5% premium to the incumbent. Quizzically I asked him about his odd pricing strategy, and after going through the 5 whys, he frustratingly blurted out that it was the ‘safe‘ thing to do. He revealed that while he felt safe selling at the current prices, he would raise prices in the future.
I tested the founder’s resolve on raising prices, asking him what prevented him from pricing his product at 30% above the incumbent and proving to his customers that his creation was a notch above what they were consuming. His response was a plan to raise prices 2-3% a year, i.e., at the rate of inflation, therefore not alienating the customers as the entire category would be increasing their product’s prices. I queried further that if he (as the founder) was willing to sacrifice blood, sweat, tears (and a lot of working capital), why sell a premium product to the mass of the market?
His discomfiture to raise prices was evident as he pushed off the decision to a future timing when things would be ‘right’. I ended that call wondering how a founder who wants to raise venture capital, both extremely risky activities, justified his stance on playing it ‘safe’. I attempted to explain the fallacy of playing it ‘safe’ and the inaccuracy in the founder’s romantic belief that he can increase prices on their consumers in my feedback.
It is insanely difficult to raise prices on your customers, and infinitely easier to drop prices on them instead. This argument holds even if your COGS are like those of the incumbent. Instead of selling at the same price, utilize the extra margins from your higher prices to increase your market differentiation through branding, trials, and marketing campaigns. That is when you could truly disrupt the market, and disruptions do not come by playing it ‘safe.‘
I could not distill this feedback in the way I had wanted to during the call. Therefore, I kept looking for the best way to explain why startup founders should take risks that their much larger competitors cannot. I found it in the opening chapter from Do More Faster India, written by David Cohen:
If there’s one competitive advantage that most startups have, it’s that they can do more, faster. And because they can do more, faster, they can learn more, faster. Startups can immediately throw things away that don’t work, because no one cares, anyway. Nobody is trying to protect a brand that doesn’t exist, and there isn’t any reason to be afraid of small failures. Startups know that that’s just part of the process.
Therefore it is sage advice to founders to experiment with pricing like they would with the product. To not experiment for your need for safety is not the approach I am looking for in founders I?d love to back.