Venture capital markets around the world are tightening and focusing on profitability, low burn, and long runways. This means that startup founders and their investors are returning to their roots — building companies that solve a pain point.

The definition of a pain point differs depending on who you ask. To us, a pain point is:

• something someone is willing to pay for because it has created outsized value, and

• if the problem is solved the person with the need will share some of that value with you
  

This means that products with negative contribution margins are likely not solving a pain point — the product is either not creating any value or not creating enough value for the customer to share some with us.

Take a look at some of the potentially murky examples of startups solving pain points:

BNPL (buy now pay later) is supposed to either solve

1. Consumers advancing purchases

2. Merchants missing sales due to their customers not being able to pay

In reality, most of the money being generated by BNPL as it seems now is made by running late payments and high interest rates on those consumers who cannot pay on time (source). Hence the suggested pain point to solve and the actual value generated is from two very different things. As such, it ended up not much different than the credit card industry it was supposed to advance (source) (we at Wright Partners also do not push such words as “disrupt”).

A second recent example is ride hailing, once touted as a great problem solver of mobility issues. Trying to solve the problem of consistent supply of rides when you need it most, it seems that the big ride hailing companies have not yet figured out how to charge enough for rides in regular times, nor find the supply when you need it the most (e.g., in Jakarta rain) (source).

Finally, after a long and good run, Airbnb is having issues on both consumer and host sides as both are becoming unhappy where hosts are trying to make more money and customers are finding services lacking and becoming too expensive (source).

From our experience and based on our belief, the issue across these three different kinds of ventures is not really focusing on identifying real pain points and developing the right solutions that provide significant value to both the stakeholder and the company that provides the solution. Within our work, we focus on doing a few things and omit some specific activities that we feel are less than important.

What we focus on when we work with corporates:

1. The value chain of the area that the corporate wants to explore (we call this the value space) clearly identify key elements alongside their revenue and profit pools

2. The revenue pools and profit pools of each element within the value space in order to identify possibilities

3. Build a calculator that identifies the inefficiencies within the revenue and profit pools to identify what can be improved and what levers can be pulled to improve it

4. The gaps within the calculator are the pain points that need to be solved and we then review the pain points together with the stakeholders through interviews

5. The above then becomes a paid pilot to ensure that the pain point is both real and valuable
   
   

What we avoid at this stage:

1. Following too many of the “trends” identified by experts as they are often too high level to provide value at this stage

2. Review of other ventures that have been funded at this stage as often what is mentioned in the media is misleading

3. Looking for jargon (e.g., Web3, deep tech, mobility) as often those words too are high level and act as valuation signalers and not focused on the pain points
   

Once pain points have been identified, the next step is to derive value from them, and once value is derived, this value in the worth of startups should translate into valuation. This area is one as well which has faced headwinds in the last few years with the biggest example being WeWork.

Comparing WeWork to Regus was all the craze in 2019 with articles like this extolling the virtues of “community focus” versus Regus’ old-school ways. In reality, Regus was a healthier business than WeWork ever was or claimed to be. That said, why weren’t they valued as highly as WeWork? Surely it couldn’t be because they didn’t offer free beer or have a community focus!

Going back to our pain point discussion, we now know that the pain point identified by WeWork (community office space) did not allow for so much value. However, the investors involved as we now know have pumped up their valuation based on the non-existent value (source). This is another thing that corporate ventures need to avoid as the pain point needs to turn into real value and only then (especially in a post-WeWork and other such failures venture Winter) valuation can be determined (and currently at much less aggressive multiples on any measure than before 2022 (source).

From experience we find that the gap from pain point to value to valuation is often due to:

1. Solution for pain point does not yield enough economics for pain point solved (not enough economics for the venture solving the pain point) e.g., eCommerce dropping as limited value is being created for customers and merchants (source)

2. The market size for the solution is not as big as initially thought e.g., Uber only being profitable in a few cities (source)

3. Valuation multiples were too optimistic and based on unrelated comparables
   
   

Contrary to popular belief, problem solving as a startup is an unsexy, painful, tiring process. It isn’t just “do something and then build a tech platform on top.” We continually ask ourselves whether the digital angle of what we’re building actually adds value — does it solve a pain point? Will customers be willing to pay for this and share some of that value with us?

When one asks themselves that question, sometimes they get answers they don’t want to hear. The reality is that from a problem solving perspective, not every startup can become a unicorn. Food and quick grocery delivery is an example where we believe value has become disconnected from valuation and that unicorn valuations should be hard to come by. There are a couple of underlying assumptions for these businesses that don’t hold which lead us to this conclusion:

Assumption: Customers are willing to pay margin positive delivery fees for food consistently.

Reality: Customers find whomever can deliver them the food they want 1) cheapest 2) fastest

Assumption: they will order multiple times daily, recouping acquisition costs (advertising, first time, and ongoing discounts).

Reality: there’s a naturally finite market because people can only eat so much in a day

Don’t get us wrong, there is absolutely nothing wrong with building a business that does not have unicorn aspirations. Not every business creates enough value or has enough potential customers to get to that outcome. What one must consider, however, is that value creation and market size are key factors from a growth and thus fundraising perspective.

If you’re a corporate looking to solve problems for your customers, shoot us a note at contact@wright.partners