Ine Jacobsen, Associate
Your problem statement is your reason for being.
Having seen and heard over 2,000 pitches in the last year alone, we dare say that 90% of startup founders struggle to clearly define their problem statement. Deceptively simple, a well-defined problem will not only capture an investor’s (limited) attention, but keep it throughout your presentation. 50% of the success of your first pitch is in your problem statement. Why? It sets the tone for the pitch and helps us understand the market size, the need for the solution and who’s paying.
In this blogpost, we shed light first on how founders can avoid the common pitfalls of crafting a problem statement then of course, on what investors look out for in one. If you’re from a B2B (enterprise) or deep-tech startup, this article is for you. For B2C startups, while important, the problem statement is trumped by your vision statement and identifying a need with consumers.
Focusing on the solution, not the problem
We understand your enthusiasm when it comes to your solution, in fact, we love it! However, the most common mistake a startup can make in its early stages is to fall in love with their product and not the problem. If there’s one thing we are sure of, is that the solution will change as it evolves for product market fit, growth and scale. A well-defined problem isn’t just for investors – it will act as a guiding principle as the company grows later on as well.
Take one of Cocoon’s portfolio companies, Hapz for example. The problem: Events organisers are not able to monetise events and have low margins. When we first invested into the company, their solution was to sell extra tickets for events. However, they quickly realised that just selling tickets was only a small part of the event organisers’ problem. By providing a single events management platform to organisers, Hapz is now able to use the data to improve the efficiency of running the entire event, of which one part is improving ticket sales. Thus by pivoting the solution to better solve the problem they achieved product market fit. Had they focused on their first solution and not the problem, the opportunity for something much bigger would have been missed.
We at Cocoon are constantly on the lookout for founders who dare to change the world. Being a startup founder is tough enough, so let’s focus on solving one problem at a time, especially at the seed stage! The classic example is defining the problem statement for a marketplace. The usual pitch focuses on both sides of the marketplace, usually with a statement similar to “customers want to have access to all alternatives, merchants want to reach consumers cheaply” – win win for all, right? Maybe eventually. However, as a startup it’s important to understand who will be paying for your service; that is who your problem statement should be focused on. Will the consumers be paying for the service with a fee for everything that they are buying? Or will the merchants pay to be onboarded?
Buzzwords don’t get us excited
This mistake is often closely related to the first mistake. The problem statement should never include phrases like “artificial intelligence”, “net neutrality”, “actionable analytics”, “data mining” – you get what we mean. Buzzwords are often related to the solution which will change and adapt over time. When this happens, you may find yourself with a really awesome product or solution that is searching for a problem.
Creating a problem
Which brings us to the next point – is your product a need, or a nice to have? Businesses are presented with a multitude of options, but with a limited share of wallet. Think about it this way – in times of a downturn, would your solution be the first or last to go? If it’s the former, the problem you’re solving is not mission critical and should be revisited.
A WELL-DEFINED PROBLEM ISN’T ROCKET SCIENCE
Solve one problem
Solutions can cater to multiple beneficiaries, but focus on the one stakeholder that you are solving the problem for. This is your immediate market size and go-to-market strategy, which will vary from institution to merchant to conglomerate – the stakeholder paying for your product. Once you focus on who’s paying, it’ll be easier to identify what the problem is for them. They will be the ones driving your revenue.
This is a big one – you have to identify the biggest pain points of the people who have the problem and where the problem is rooted. Who controls the budget for the solution to the problem? The pain point has to be so significant that the stakeholders are willing to part with their limited budget to purchase your solution.
Keep it short
The problem statement should not be longer than two sentences. It should easily fit on one pitch deck slide.
DEFINING A PROBLEM IS NO LONGER ONE
Now that you’ve crafted your problem statement, think about the following questions: Does this problem keep directors and executives up at night? Is this problem a topic of board meeting discussions? If you took away your solution, would the problem still exist? If the answers are a confident yes, yes and yes, then you’re on the right track. If not, don’t be afraid to recreate and reiterate till you get it right.
With a good problem statement in tow, investors can now clearly understand and get excited about the opportunity the problem presents, with a strategic overview of your company and how we can value-add to accelerate your growth.