D.F.A., or, Please Do, #3
What's more important for startups: sales, product or finance? An interview with the company that got women to permanently go braless, and exciting news about Scout, a D.F.A. company.
The response to our 2nd newsletter was huge. I understand this is now the 3rd most popular newsletter in venture capital, behind Not Boring and and Lenny’s Newsletter. We have about 115,000 subscribers, nearly all accredited investors, and most work in either venture capital or private equity.
Learning About D.F.A. Capital
In the last 2 weeks, we’ve formally launched D.F.A. Capital Fund 1. Typically when we have conversations, we’re meeting with folks who are into the following areas:
You have a background in SaaS, telecom, agtech and ideally customer relationship management or marketing/sales automation (CRM)
You love meeting with founders a few times a year
You love sales like we do (we invest in sales-focused founders)
I’m in Chicago and New York every 6 weeks and can always meet in SF or L.A. fairly often. To book a time to chat, click here.
Which matters more, product or sales?
The Steve Jobs (Apple) Approach vs The Steve Ballmer (Microsoft) Approach
What part of a startup drives the most success: product, sales, or finance?
Sorry to mess with you so early in the newsletter. It’s a trick question - all three. That's the short answer, and whoever runs the biz needs to make sure all three happen in the right proportion, at the right time. But what should the pie chart look like?
First, let’s look at finance. Founders need to raise money, budget things, hit their financial targets, and use metrics to track things. Sometimes, it’s appropriate to run decades-old mature businesses in mature industries using a finance-driven culture.
Finance-driven cultures make sure that each project beats a specific and appropriate hurdle. Usually those hurdles are measured by things like return on investment (ROI) or net present value (NPV). This typically goes hand-in-hand with continuous process improvement driving operational efficiency.
Financial and/or operational efficiency is why companies like the home builder NVR, auto parts retailer O’Reilly, and diversified conglomerate Danaher are top dogs their respective industries. These three companies are among the top 15 performing companies in the S&P 500 over the last 30 years. That’s a good run.
But finance, as important as it is, is pretty much NEVER the driver of a young business, and certainly not a young business in a nascent industry trying to achieve product/market fit (PMF). If that’s already achieved, the business is trying to grow as rapidly as possible, to try to fill the market void.
To hit a startup’s elusive product/market fit (PMF) or unlock the rapid growth flywheel, founders need some combination of product and sales, and finance usually gets relegated to a supporting role.
So which should be emphasized more in the early years, sales or product?
This is one of the toughest decisions for startup founders, and, in reality, it often comes down to either one of two things:
Whatever the founder’s advisors or early board members insist more strongly upon, which is typically driven by their personal expertise (i.e. board member was an engineer before they were a VC, so they emphasize product)
Whatever the founder and their chief lieutenants happen to be better at
Could be either, right?
Let's consider two famous companies that both controlled the operating system market for personal computers: Microsoft and Apple.
They started out somewhat similarly, but as company cultures evolved, we had:
Apple: product-driven (Steve Jobs)
Microsoft: sales-driven (Steve Ballmer)
Note both had competent finance departments like most other successful companies. But finance didn’t drive success for either. For one it’s product, for the other it is sales. Despite their ups and downs, both recipes for success led both companies to be among the most phenomenally successful companies ever by almost any measure.
Given this, what kinds of founders and company types do VCs look for - product-driven, sales-driven or both?
Or to put it slightly differently, do investors look for founders who have great engineering/software/product prowess, or amazing sales professionals, or both? Heck, my background is sales. Does this mean that I couldn’t be a founder unless I found a co-founder that’s a great product person?
Ideally you'd want to be both, but since about 2008, it seems as though investor bias is towards seeking product genius, and building sales functions later. But that’s only one model of company-building.
What if a VC firm were to have a bias in the other direction - by seeking companies and founders that are more sales-driven than product driven? Does that even make sense? How can you have sales if you don't have anything to sell?!
For example, if 100 companies all sold premium ice cream and one of them, Häagen-Dazs, was owned by a conglomerate which had locked up most of the distribution channels, there's absolutely no way 2 hippies from Vermont taking a $5 correspondence course in ice cream making could possibly go beyond selling a few scoops locally, right? Uh . . . what about Ben and Jerry's? Try reading Ben and Jerry's: The Inside Scoop if you want to be entertained by Ben Cohen's antics as a salesperson and how two hippies from Vermont beat the giant Pillsbury corporation with T-shirts, bumper stickers, and a 1-800 phone number.
For a more mundane example, let's say you want to start a business to get better cell phone coverage in large buildings or warehouses, given the lousy cell phone coverage at so many business locations. Does making cell phone coverage better require a product expert or an engineering genius? Not exactly. I managed a very lucrative P&L that did exactly this for 2 years. Don’t get me wrong, it takes basic engineering know-how, but it took a solid combination of e-commerce knowledge AND engineering knowledge in order to gain sustainable marketshare. (A huge hat tip to my former CEO Sina Khanifar, who is probably the best SEO and e-commerce maven that I’ve ever worked with, and I’ve worked with a *lot* of them.)
Sure, you'd want competent techs to design and install better cell phone coverage for your home or business. But what your business really needs to succeed is a sales organization to make it happen, as all the competitors will be selling approximately the same thing. There were probably 5-6 companies that sold cell phone coverage for businesses, but only one of them (2018-2020) had a really good sales team, and that was the one that gained a lot of market share.
To summarize:
Can a young business (startup) become wildly successful mostly on the strength of its great finance leader? The answer to that is almost always no.
Can a young business become wildly successful mostly on the strength of its awesome product idea developed by a genius engineer? Absolutely yes! Google is a terrific example. And this is the type of business glorified by VCs all over Silicon Valley, for good reason.
But . . . Can a young business become wildly successful mostly on the strength of its awesome sales force, sales organization, and selling culture? Absolutely yes! It is not the only way, but it's a way that is under-appreciated in startup land, and it's a market opportunity that our VC firm aims to exploit, a theme we'll return to again and again over the coming months and years.
Scout Comes Out Swinging!
D.F.A. portfolio company Scout makes it into Yahoo News! and TechCrunch! Founder Michael Haddix Jr., who you may remember if you’re a huge college basketball fan (Siena, Division 1) or a very big football fan (his father was a NFL first round draft pick back in the ‘80s). Scout just closed their pre-seed round, led by Chingona Ventures.
Interview: Heather Eaton, Founder, Frankly Apparel
Once in a while, I come across a founder, and a company, that I find so different and cool that I know, right away, I want to interview them for our newsletter. My family came from the apparel business (my grandfather and his brother co-founded Lark Luggage with his brother in the 1940s), and when I saw what Heather and her co-founder Jane Dong were doing, I had to take a few minutes to interview them.
Why did you and Jane choose to create Frankly, instead of, say, creating an apparel company that did regular cut-and-sew or tops as well as braless apparel?
Women's apparel is quite a saturated (and wasteful!) market. We didn't feel the need to be just another apparel brand amongst many: we knew that if we wanted to be differentiated, we had to be doing something totally new and innovative. It's a personal problem we are solving, and one that the market didn't seem to be addressing on its own. That authenticity is what resonates with our community. The idea of mixing braless and non-braless apparel within a single brand felt like it was muddying our message to consumers. Between our unique approach to fit (including split sizes for busty women) and functional support in every garment, the value to our customers is extremely clear. [Apparel lingo: Split size: This means you can go up a size in the bust versus the rest of your body. For example, you might be a medium in the bust, but a small in the rest of your body. You would be an M/S in that sizing. A normal small would be a S/S]When investors are evaluating an apparel brand that is creating a net-new category like braless apparel, what are they typically looking at? What's your fundraising trajectory like for the next 6 months?
First, I think the investor has to believe that the white space exists, but won't exist for long. Then they are typically looking to make sure a) you have a very specific POV on how to fill that white space and b) you can deliver on that vision. For our investors, that meant seeing a clear, concise brand message / identity and a working product that was beloved by consumers. A huge plus for us was our ability to build community around our brand (including over 100K organic followers and multiple viral videos on TikTok) and to acquire customers without relying on the paid ad treadmill. Currently, we are testing in-person retail through a partnership with Neighborhood Goods, and plan to raise again at the end of Q1 2023 once we know more about that channel.How did the pandemic change womens' taste in work and casual wear, and what are your predictions for the holiday season?
During the pandemic, we saw womens' fashion priority shift almost exclusively to comfort. For many brands, this accelerated their move into the athleisure category. For Frankly, which we were just getting off the ground, this was a huge tailwind as women began questioning the need to wear a bra everyday. As "life as usual" resumed and people started spending more time back in offices / public, the pendulum swung back in the other direction, but women are now far less willing to sacrifice comfort just for the sake of style. They require both from the brands they love. For the holiday season, I think you're going to see that consumers are looking to have fun! Style + comfort is still the play, but coupled with bold, boisterous colors, velvets, leather, and other unusual textures.
Regards,
Adam
P.S. This newsletter is a little different than our usual format, and doesn’t feature our usual Bad Reads 📖 & Bad Tunes 🎸 stuff. We’ll get back to that in issue #4. We just had a lot of stuff (interviews, etc.) this issue, and didn’t want to miss anything!