VC Mental Models: Is your product a vitamin, pain killer, narcotic, or a religion?
Mental models of Venture Capital Investing
Venture capitalists use many mental models to help grok an investment opportunity. One of those mental models is to ask whether the product is a vitamin or a painkiller (Spoiler alert: VCs tend not to invest in vitamins although some have made this successful). Some companies defy this dichotomy with what I’ll call narcotics and religions.
Vitamin products can sound like a great idea, but invariably they never take off. Novice investors are prone to invest in vitamins because they think about the benefits without weighing the costs. A tell-tale sign of a vitamin product promises a vague and unquantifiable future benefit to the customer with an upfront cost.
Because vitamins don’t evoke an immediate qualitative change in the customer’s state, there’s no ongoing imperative to use the product. If the customer’s cost to use the product is time, money, or both, there’s added repurchasing friction. In general, vitamin products tend to have a high churn (cost >> perceived benefit). If we define product-market-fit as the intersection of growth and low churn, vitamin products tend to be poor outcomes.
In the world of agtech, we see these kinds of products all the time. They’re often pitched to us as an ERP system that makes improvements over someone’s excel spreadsheet-based system, but requires significant onboarding and data entry, or dashboards to ‘help farmers make decisions’. Usually, the cost is both time and money, and while there may be some future benefits, few customers stick with the product long enough to realize them and even fewer are willing to pay.
When you wake up with a burning headache, one of the first things you’ll do is to reach for your Tylenol. If you’re out of Tylenol, you’ll get out of bed and drive to the nearest pharmacy. Dealing with your headache is a priority. Unlike vitamins, which are nice-to-haves, painkillers appeal to a customer’s functional needs.
Over the past six years, labor costs as a function of gross farm income have been trending upwards which is placing unique pressure on farmers' thin margins. For farmers, labor is one of their biggest pain points, but it’s not just the cost of labor--they also struggle with availability, consistency, reliability, and the added overhead of managing people. It’s no surprise that most of the successful agtech innovations are substituting labor for CAPEX/OPEX.
Automation is the only viable way I see to ease the pain American and European farmers are facing and so we’ve invested heavily in on-farm robotics (Bear Flag, Root AI, Tevel, Verdant). Because labor is something that farmers already pay for, we know the real demand and we can also easily size up the market.
Unlike vitamins products, painkiller products tend to have low churn as customers can’t live without them. Minimally this is where you want to be investing.
Narcotics are a class of products that are highly addictive and where the use of a product often increases over time and once you have them, you can’t live without them. A product that begins as a pain-killer may evolve into a narcotic as the company adds new features and moves the customer from “this is solving my problem” to “this is solving problems I didn’t even know I had!”.
Prominent “narcotic” products might include entertainment, games, social apps, food, and dating apps — a class of products that tap into our lizard brain — but there are also everyday products that we may use that have an addictive quality. My iPhone is one of those products, but so is Airtable, which I’m always finding new uses for here at AgFunder (I love this app). Narcotic products are hard to find. If product-market-fit is the intersection of growth and low churn, narcotics will have exceptionally high growth rates and/or exceptionally low churn rates with a high frequency of use.
In our own portfolio, I look at companies like Solintec and Fieldin that both orchestrate the activities of equipment operators (Solinftec in row crops, FieldIn in high-value crops), telling the equipment operators where and when they need to be at any given point in time. In Brazil, Solinftec manages nearly 85% of all sugarcane acreage and is used by nearly all major producers. These are large complex operations with thousands of pieces of equipment and it needs to work like clockwork. When you walk into the IT rooms of these companies, you’ll see dozens of screens that look like Bloomberg terminals on a financial trading floor. Today it would be nearly impossible to run these companies without a solution like Solinftec. Not surprisingly, both companies have nearly 0% churn--if that’s not an indication of addiction I don’t know what is.
The last product category is what I classify as a religion. These can be some of the best investments because they speak not just to a customer’s functional needs but also their emotional needs. Often, these are products that embody an identity and an ideal that the customer aspires to. Customers declare their allegiance to these values by using and evangelizing these products.
Religious movements typically don’t happen overnight. When they emerge, they often spring forth from the founder’s ideals (Musk, Jobs). Companies that attain this status can be incredibly durable to competition, but they can also be brittle because they always need to hold themselves to a higher standard.
Perhaps the best examples of investments that have attained religious status include Apple, Bitcoin, SpaceX, and Tesla. All have a rabid following and loyal defenders. In the case of Tesla and Bitcoin, faith can also propel them to valuations far beyond what many would see rational.
While Apple, Bitcoin, SpaceX and Tesla, and Bitcoin, maybe exemplars, there are many other examples that have or are taking on an almost religious nature including Airbnb, Coca-Cola, Google, Ferrari, Nike, Starbucks, Stripe, Patagonia, Porsche, Toms, Zappos.
When looking for the early signs of a religious product in our early-stage portfolio of more than 40 companies, three stand out as potential contenders: SIMULATE, which makes plant-based meat and aims to make the ‘Tesla of Chicken’ founded by a 21-year-old prodigy Ben Pasternak (and who I believe may become the Elon Musk of food); Atomo Coffee, which is making sustainable ‘molecular coffee’ without the coffee bean -- and it’s the best coffee I’ve ever had; and Mycoworks which makes REISHI, a stunning and luxurious leather made from mycelium (the root structure of plants) that’ll be launching with major iconic brands later in 2021. With all three of these companies, you have authentic and passionate founders driven by a deeply personal mission to change the world through magical and elegant products that inspire positivity.
The next time you’re evaluating an investment, ask yourself if this company or product is a vitamin, painkiller, narcotic, or religion and gut check it with your heart monitor--the higher your heart rate the better. If you’re a founder, you need to take a cold hard look at your product and ask if people genuinely care. As Paul Graham reportedly told Brian Chesky at Airbnb, “Build something 100 people love, not something 1 million people kind of like.”