June 18, 2023
Developing Financial Products Series - Step 1
Happy Sunday, friends. In the last newsletter I shared a high level framework for actually getting a financial product to market while balancing the opposing forces of growth and quality. This week I’ll dive into the first step: Identifying a market need.
Sounds easy, right? It’s not.
Here’s a common story, this one straight from my own archives. When Carlos and I launched Novel, we spent a lot of time talking to entrepreneurs about what they thought about our new product idea, an RBF loan. We were convinced, based on our own beliefs, that it was a great product…and it was. We were further convinced that the market need was substantial. We were right about that. But we didn’t really understand the market yet. We went out and talked to entrepreneur after entrepreneur and discovered that *gasp* entrepreneurs wanted it to be easier to get the capital they needed. And when we walked them through our idea, those entrepreneurs were excited for us to come back when we had capital to deploy.
We thought we had a real winner on our hands at that point. So we built a product and raised the capital. Once our first close was imminent, we went back out to those same entrepreneurs. We hit a brick wall. They all declined to take our money.
That was a shock. In retrospect I am embarrassed at how shocked I was. I was so naive. Of course it wasn’t going to fly off the shelves in its first iteration! Few things do, and in a credit product, if it does, it’s probably not a good thing!
We simply didn’t yet understand the real need yet. To make matters worse, I was personally pretty enamored with the structure of our product, which is a classic mistake of entrepreneurship. I loved the product and didn’t understand the market. That’s a tough combination, and one we see happening in the alternative capital space often. You can hear more about the challenge of capital providers innovating for innovation’s sake in our recent podcast episode with Jamie Finney.
The truth of the matter was simple: Some founders just weren’t that concerned about the things we initially thought they cared about. So how do you get to the essential problem, the nugget of truth that sits at the core of a customer’s need? Here are some ideas to help you get there.
First, take a step back.. You see a need that you want to fulfill. Congratulations, you have an idea. Bluntly, most ideas should be killed. Ideas are, after all, cheap. You should be prepared to feel that in your bones – to lose your attachment to the idea, and then you can really learn.
Second, go deeper. You probably have a set of biases that cloud your judgment and that make it difficult for you to see past the idea itself – especially if you’re an expert in the field. That means you have to get underneath the hood, get into the motivations, fears and desires of your customers. Develop a set of questions you can ask potential customers that give you an opportunity to understand the deeper stuff. Here are some examples if you’re developing a new capital product (NOTE: Don’t use your product idea as the guide to your questions yet):
What are the biggest problems you face as an entrepreneur?
When you need to fund an initiative, what do you do?
Have you ever needed to fund an initiative and been unable to? What happened?
If you could raise capital to fund an initiative right now, what would that capital look like?
What keeps you up at night?
Compile the answers to your interview questions and spend time really digging into what you learned. Once you understand the motivations, fears and desires of the founders you’re aiming to serve, then you really understand the market.
Third, Take your insights and go back out on the road. Talk to more entrepreneurs. Now you can ask them questions from a deeper level of understanding and be pointed:
Do you have these problems?
What have you tried to do to solve these problems?
Why haven’t you solved these problems?
Would this product solve your problems?
What parts of your problem aren’t solved by this product?
What would you pay for this product?
What about this product doesn’t work for your business?
Now that you’ve gathered this feedback, you are closer to understanding your market, and you may have the beginning of a product that the market wants.
I recommend running these interviews for a few rounds until you can finish the sentences of the founders you’re talking to. Once you get there, you understand the market and you can begin to develop a product.
In the next few installments I’ll share some ideas on how to:
Develop your thesis, product, and investment criteria
Develop your diligence process and risk profile
Test your product and processes on a live deal
Gather feedback, learn, iterate.
Do me a favor and let me know what you think. Share your stories, ideas and feedback with me so that I can continue to provide you with useful information in the newsletter. Just hit reply!