Are you thinking about applying to 500 with a Blockchain idea? Want to maximize your chance of getting selected? This article describes how one successful applicant, Crowdz, passed our rigorous acceptance process and explains how to formulate a successful strategy for your own 500 application.
Earlier this fall, our accelerator team spent weeks reviewing and interviewing nearly 2,000 program applicants for Batch 24 of our Seed Accelerator program in San Francisco. Applications came from startups in enterprise software, deep technology, and of course, Blockchain. In the end we accepted just 22 companies, of which only five became part of our Blockchain track—a specialized cohort focused on foundational protocols, financial applications, tokenization of physical or digital assets, and enterprise applications.
Why so few?
Many applicants did not have compelling answers to the key questions VCs ask themselves when making funding decisions. Here are some of ours:
- Does the solution present a good use of Blockchain?
- Is there a clear valuable market?
- Does the product meet customer needs?
- Does the solution offer a competitive advantage that customers value?
- Is the team skilled in the critical areas?
- Is the company structured to meet the VCs financial needs?
Let’s take a look through this list using Batch 24’s Crowdz as an example of how to successfully answer these questions. The example I have chosen happens to feature the invoice financing market, but of course we accept applications from a wide range of enterprises.
A quick note for readers unfamiliar with invoice financing: this market targets the lag time between when a company ships a product and when they get paid. For many B2B companies the delay often runs over 60 days, sometimes over 120! This time gap drains an enormous amount of cash from companies constantly in need of capital to grow faster, pay suppliers, and process payroll.
Does the solution present a good use of Blockchain
The invoice financing market is particularly well-suited to Blockchain. It requires multiple entities to coordinate on the data and no one wants any single entity to control it, so a Blockchain solution has a significant advantage here.
Previous startups addressed the problem by using a regular SaaS and database solution that they owned. This generated poor results for most companies and limited the size of the market. The new solution on Blockchain had a clear advantage of not being owned by any of the players, it contained immutable records for audit, and by using a standard format instead of a company-specific one, it allowed all companies involved in the transaction to use a single source of data for their work.
Is there a clear valuable market?
Like many VCs, I am always on the lookout for large markets that can be suddenly disrupted by a new technology. The invoice financing market is a $9 trillion dollar market weighed down by huge, structural inefficiencies. The existing solution for invoice financing is based on very old standards and processes: paperwork, faxes, and extensive human interactions for each and every financial transaction. Hundreds—even thousands—of dollars of costs associated with invoices that go through this process make it expensive and only practical for a small range of invoices. In short, a company can spend 20+ hours completing a single invoice and then wait weeks to get payment.
This delay is a massive drain on a startup’s resources; they pay for the materials, labor, and shipping, and then wait a really long time to receive payment. Clearly, any decrease in the time between shipment and payment would dramatically increase production without the need for more capital.
The invoicing market is attractive to VCs for many reasons. It is well-defined (we like that), with lots of competitors (we like that too), and customers are presently buying a lot of it (good) even though it is a very painful process (lots of friction in the current system). The buyers for a solution to this are also well-defined (also good), are targetable with marketing methods (good) and potential customers for a solution are high-intensity buyers, spending a lot (very good).
Moreover, the invoice market has lots of expensive friction (read: great opportunity; easy to improve this tenfold), days to weeks to complete and the customers are very time-sensitive (good, highly valuable feature, that is readily solvable). It requires expertise in the field (good barrier to entry), needs big financial(s) backers to make work (good in this case because the applicant had this), requires trust in a trustless system (good candidate for Blockchain), high security situation (good use for distributed ledger), and requires immutable records (good, the applicants had blockchain built in).
Several applicants addressing this issue were eliminated from consideration because customers seemed unwilling to pay a reasonable price for the product, and many other applicants showed no clear demand for the product they were producing. VCs want to see a problem that has clients willing to pay immediately and at a premium for a product that offers a solution, even if that product is not ready yet.
Get customers first, build it second. VCs love that.
Does the product meet customer needs?
The short sales cycle and high price points prove the market demand, so yes, this product meets customer needs.
Does the solution offer a competitive advantage that customers value?
The invoice financing market is crowded with large well-entrenched players so for us to move forward with any team, they have to have a clear way to win, a clear competitive advantage.
There are 10+ ways the company can ensure a competitive advantage, from product and channel advantages to branding and operational excellence. Most applicants, however, forget to validate three critical aspects of the proposed competitive advantage.
- Does the initial target customer value the competitive advantage?
- Is the team skilled at the competitive advantage?
- Is the target market big enough and accessible to the company?
The team at Crowdz was focused on the ease of use and time to money, in other words, standardizing the application process for the client, making it easy to understand the rules, and getting money into the bank account of the client 10X faster. The strategy uses Blockchain, but the focus was on customer value. They validated their customer advantage, got a team with the skills that could build what the customer would pay for, and checked that this particular target market was sizeable and growing by 20 percent per year.
For this market and product:
- It has be secure
- It needs financial backing before anyone can really use it
- It needs the necessary KYC/AML safeguards
- It needs to have very high uptime
- The transaction must complete in minutes and funding must complete in a few days
- The pricing should match existing systems (it should not be higher)
The Crowdz product performed well on these requirements. It completed the transaction very quickly, in many cases in seconds instead of days; it was AML/KYC compliant; it has a large financial backer (Barclay’s); it was distributed (high uptime and security); it used Blockchain (immutable records); it sustained a high volume of transactions in the 10k per second; and the overall customer satisfaction was very high. Overall the product shows signs of solid product market fit.
In our internal discussion about Crowdz, we questioned whether they were going to win this or someone else. Specifically, could a bank step in with a Blockchain solution and crush them? In the end, we decided they had enough of a lead to win. We also agreed that the banks gained a lot being partners without having to handle new software and would have enough incentive to sign on and not compete. In contrast to some of the other applications, the solution proposed by Crowdz would be very difficult for existing players to build. Most banks did not have the Blockchain skills to build a competitive solution and the internal politics would never allow them to build a distributed solution.
Unsuccessful Blockchain applications featured simple feature extensions for their competitors, and/or there were large barriers to switching from the existing players, and/or the competition had a significant established customer base with moderate to high customer satisfaction. These factors make it hard for us to move forward with funding. We need to see the prospect of a 10X improvement in a function customers really care about so there is enough incentive for customers to switch.
Is the team skilled in the critical areas?
Any product like this would require a range of skilled team members covering solid Blockchain engineering, deep industry knowledge, enterprise selling and business development, and at least one person that had good-to-great presentation skills to drive fundraising and close bigger deals. We also like to see connections to the funding source or contracts in place, since they will be much harder to get than the customer base.
The Crowdz team included in-house full time Blockchain developers (good), multiple people with knowledge and deployments expertise in the industry with experience solving it the old way for many years (good), the entire team was full-time (good), the team had worked together before (good), the team had exits (good), and finally, the team did a good job with its presentation during the meeting.
Is the company structured to meet the VCs’ financial needs?
We look to see if we can achieve 50X to 100X our investment in the next seven years or so. This means not only does the company have to grow very fast, but it needs to provide a means for VCs to exit the investment.
In this case the team, product, market, and structure were all well-suited for this scenario. They had experience with this area in the past and they were aggressively planning not only the growth but the later stage steps to insure that an exit was possible. The CEO had 18 years experience in global supply chain for a large networking company. Two other senior team members at Crowdz had worked with the CEO on supply-chain matters for more than a decade. And another team member had three previous tech-company exits.
In summary, you need at least five major elements to land an investment from our Blockchain track:
- A clear high value market with advantageous positioning
- Product that meets customer needs and a clear indication that customers are willing to pay for it.
- A competitive advantage that customers value and the team can execute on
- A team highly skilled in the areas critical to success
- A company structure that allows VC funding and exit in a 10-year timeline
I hope you found these tips helpful as you prepare to apply for our next track in February 2019. Any questions? Feel free to contact me at Rob@500.co or Telegram at NoOneOfSignificance.