There are many reasons why an investor may choose to invest in a startup. It may have an interesting business model, operate in a growing market, or have a really cool product. While these can all be compelling reasons to invest, a startup’s value proposition (or lack of) can tell investors a lot about the company as a potential investment opportunity.
What is a value proposition?
A startup’s value proposition describes what the startup does, why it exists, who its target customer is, and why it is uniquely qualified to solve the problem it aims to solve in a clear and concise way. Having a solid, well-thought-out value proposition is important for a few reasons.
Foundation to build on
Arguably the most important reason why a well-defined value proposition is so necessary is everything that builds upon it. Impactful sales and marketing efforts depend on knowing how the company is different than the competition, who the target audience is, and how best to connect with them. Without a clear, accurate value proposition, the foundation for these critical activities is shaky.
Developing a simple, clear, and interesting value proposition takes a lot of work and exploration, it doesn’t just happen by accident. For a startup to really find its identity, understand its customer, and articulate this vision accurately takes a while. Startups that are able to achieve this level of discovery and self-awareness can show that they are credible in their efforts to deliver on a solution for the right target audience.
When a company is first getting off the ground, no team has it all figured out right out of the gate. Oftentimes, many startups, especially those dealing in complex technologies, may have a difficult time distilling down their product and its purpose into a simple value proposition. Companies that truly know themselves and have a clear vision tend to have a much easier time communicating their purpose and what makes them unique in a succinct and compelling way.
Evaluating a value proposition
Broken down, a precise, well-done value proposition should communicate the following clearly:
- What is the company’s “why?” – They may have built something cool and never-before-seen, but what is their purpose and reason for existing?
- What solutions does your product provide? – What problem is the company aiming to solve, and is it a large enough problem?
- Who is their target customer? – Does the target customer make sense? Is it a large enough target audience that will enable to business to grow and scale in the future?
- What is the target audience’s pain point? – What is the target audience not getting with the solutions they’re currently using, and how does the company provide a solution to those pain points?
- What are they doing differently from the competition? – How does the company compare to its competition, what is its advantage? Similarly, does it seem to know its competition well? If a company claims to have no competition, be skeptical.
Creating a value proposition isn’t easy, it’s difficult and it takes time to properly develop. Startups that are able to do this well early on in their journey display the critical thinking, organization, and insight that are crucial to the long-term success of any business endeavor.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.