Aug 27, 2023
Step 3 of Developing a Financial Product: Go To Market
Happy Sunday friends! Today we continue our series detailing a framework for developing financial products, and our topic is step 3 in the process: Testing a Live Deal.
By now, you’ve developed your product and credit thesis, your diligence and risk framework, and the pricing you think works in the market. These are all things that have a high probability of not faring well once they hit the reality of the market, but they are essential parts of the framework of your initial product — the first stab at getting to product market fit (PMF).
So now let’s go get a deal done!
I’m going to assume you have a deal to test your product on (if you don’t, that’s a whole different set of processes to build and test!). I’m also going to assume you have sufficient deal flow to run and iterate your process a few times in succession, and perhaps even simultaneously, in order to learn quickly.
Ok, you have a deal to test your product and your process on. It sounds easy enough, right? Just get all the info required by your diligence process, review it, and fund! Right? Wrong. There are so many things to consider. First, how much info do you ask for right out of the gate? Asking for too much kills momentum and asking for too little leaves you unable to actually make any decisions. Here I suggest you design a process that (a) stages your decision-making; and (b) makes it as easy on the entrepreneur as possible. The information you request should be driven by your risk framework, which you’ve already developed. Don’t ask for more, and don’t ask for less!
Once you have that process roughed out, ask for the first set of information you need to get to the first decision. I’ve seen the “first” decision take a number of forms but these are the two most common:
Yes/no on a term sheet - in this case you request enough info to get you to comfort for a term sheet. This is hard in your initial product testing, so I would recommend NOT trying to do this right out of the gate. Once you’ve successfully funded a few deals (say, 10), then you can shoot for getting to a term sheet that quickly, if you think it’s important.
Yes/no on basic fitness for a deal, prior to term sheet - this is easier, and allows you to stage your decisions (and iterate) more easily.
You’ll want to have a process that gets you to your next decision as well. Maybe your next decision is whether to fund. If that’s the case, you’ll want to gather all the information you need in this step so that you can get to that next decision. In any case, err on the side of having more than enough information to make the next decision in your process flow. The last thing you want to do is dribble in requests so that the entrepreneurs you’re talking to are constantly chasing down data. Make it easy for them; otherwise, someone else will swoop in and fund that deal.
Now that you’ve designed the steps in your funding process and you know what you need to ask for in the initial step, ask for that information, and get to that first decision point. Run your decision process.
At this point, a few problems might crop up. Perhaps you realized that your process doesn’t actually get you the information you need to make a decision, or you’re not confident in your decision process or risk assessment, or if you’re at the funding decision stage, you’re suddenly terrified of pulling the trigger. Not to worry; this is all normal, and this is where your process is key. A key part of your deal process — especially at that stage — should be to quickly iterate and adjust your approach (e.g., the information you ask for, the decision criteria and process, risk assessment, etc.) so that you are quickly learning and adapting.
Deals will fall out of your funnel for one reason or another. At these initial stages while you’re still building your process, do a postmortem on each one you lose. How could you have kept or won that deal? What are the reasons you lost it? Be open and honest here; set your ego aside and really dig in to what drove an entrepreneur to decline your terms, walk away, or ghost you. There’s a reason for it — find it, and adjust your process to reduce the probability of that happening again with good deals.
Here are a few key areas to gather feedback and potentially adjust your process and approach:
Are entrepreneurs pushing back on information requests you’re asking for, or do they not have what you need? Reevaluate whether you need that information after all; maybe you want something they don’t have, and a giving them homework won’t help you get a deal done (and may not help them run their businesses any better). Perhaps you’re asking for something inappropriate to their stage or maturity, or you’re asking for something that isn’t critical to their business.
Are entrepreneurs confused by how your product works? If they have to ask a bunch of questions, it may be too complicated. Remember, cleverness is the enemy of simplicity. Be open to that feedback — just because it’s a cool financial product with a clever payback structure doesn’t mean it’s going to work.
Are the entrepreneurs you’re talking to balking at anything in particular as you walk them through the process? Price, time to funding, and sizing are common areas for push back. Listen to that feedback and let it guide you as you continue through the process.
Listen to the feedback and adjust your process. This is an exercise in continual iteration and adjustment.
Now, let’s say you get a company to sign up to your terms, and you’ve run your diligence process on them and they’ve passed. FUND THE DEAL. Don’t wait, don’t hesitate. That first deal is hard to get to and even harder to pull the trigger on. Fund it.
There you have it. Simple advice for testing your approach on a live deal, and getting that first deal done. Feel free to share feedback, argue with me, or share your experience with me — just hit reply!