Pinpointing Problems Worth Solving (Part Two of Three)

In my last post, I wrote about how many startups fail because they try solving problems no one really has or cares enough about to spend money to solve. I mentioned that while poor execution is responsible for many startup failures, you can’t execute your way out of a bad idea.

In the venture capital community, technical founders are extremely desirable. From an execution standpoint, technical founders have a tremendous advantage in getting a prototype or an MVP out quickly and least expensively because of their ability to write code and iterate on their own.

But, there is an intuition inherent in founders who are solving problems in industries in which they have been involved in different capacities over very long periods of time. And even more so when they have been wrestling with related problems in that space.  I call these “deep domain experts.”

These founders have the best chance of nailing customer requirements and getting to product-market fit quickly. As product-market fit is a threshold event indicating an investment might pay off, this is critical for investors (and founders, of course.) Who wants to spend three to five years of their life building a company only to realize that the product doesn’t meet the needs of its intended buyer? (I did this once, as detailed in my first post, and I wouldn’t recommend it.)

I like these deep domain expert founders best. I am not alone. Pedro Torres Picon of Quotidian Ventures is raising a fund that will focus exclusively on deep domain experts.

I have had a personal experience with a few of these founders, the first of which I will detail in this post:

Steven Gottfried is the CEO of ServiceChannel. I was an early investor and serve as Chairman of his board. ServiceChannel offers a SaaS solution that automates the way companies with facilities in lots of locations manage third party service maintenance companies (HVAC, landscaping, fire safety, etc.) that come and fix things at those locations. Their customers are facility managers at large retail and restaurant chains. ServiceChannel manages the work flow, processes financial settlement, and provides big-data analytics on things such as pricing and performance, by region and by industry. The software is used by most major retail brands you can think of.

But back to Steven. The summer after his sophomore year of high school, Steven went to work for Gotham Air Conditioning, which was owned by his girlfriend’s father, Herb. That first summer, Steven drove a parts truck, delivering supplies to the mechanics at their job sites.  He would often linger and watch the precision with which these professionals did their job.  The next summer, he worked in the warehouse, where he would help load the trucks in the morning. He noticed how at the start of the day the mechanics would assist the warehouse staff in carrying heavy air conditioner compressors from where they were stored and hoist them up on the truck. He thought this made no sense. Why make these guys, who were experts at their trade, and had a long day ahead of them, do all this extra work?

So Steven designed a pulley system that enabled the compressor to be picked up from where it was stored and slid across an I-beam on a trolley to the truck where the mechanic would guide it into the bay. The simple act of solving an annoying problem significantly improved the mechanics’ attitude and productivity.

During the third summer, Steven worked in the office matching purchase orders to parts supplier invoices in order to make sure parts were ultimately billed. He would often ask the mechanics to indicate more clearly in their work orders which parts were used. The mechanics just wouldn’t change their habits, and even Herb, the owner, couldn’t mandate them to change their behavior.

Faced with this obstacle, Steven started to understand how the mechanics viewed themselves and how seriously they respected the hierarchy (helper, apprentice, journeyman, etc.).  A five-year journeyman would never change a filter, that was for an apprentice to do. He learned that skilled tradesmen viewed themselves as experienced professionals and often felt looked down upon because they were not traditionally educated. At the same time, their bosses and customers felt completely vulnerable to them because they had a skill set that their bosses and customers didn’t have, which was critical to the business – it was the business.

Steven told me:

“Respect, which tradesmen crave, is completely disproportionate to knowledge and power!”

Steven went on to study computer science at George Washington University. Don’t call him a technical founder though, as by his own admission, he was a terrible programmer. Over the next 15 years, Steven started businesses involved in developing predictive failure systems for air conditioning compressors and contractor maintenance management systems for contracting companies. Each of these products leveraged the nuances learned at Gotham working for Herb.

Steven always says:

“All my products are developed from the mechanic’s or the tradesman’s point of view. Even if the buyer of the product isn’t the tradesman, as long as he is the user, the product must mirror the way he works, and be easy for him to use. He is the lowest common denominator. The product must be tradesman-centric.”

After solving problems in various contracting subsectors for 22 years, ServiceChannel was born out of a request from a contracting company to send a report detailing their work history to a client. Steven understood what the motivation was – the best contracting companies want to show their stellar performance details to their clients. Steven put it on the web so contractors could make it available to all their customers.

Intuitively understanding the nuance of how tradesmen work, particularly what they will and won’t do, influenced other key product decisions, such as the initial decision to make it available to all the contracting companies he provided software for, the way credentialing is done in the company’s Fixxbook directory, and the decision to build a multi-tenant, shared database architecture (without knowing it was a SaaS best practice), so a contracting company could see all its activity, across all its accounts in one view, and to efficiently plan routes to many customers based on proximity. Things Steven knew intuitively, honed over many years, a technical founder or business school graduate would have had to learn through long, painful, and expensive trial and error.

Evidence of the impact of Steven’s understanding of the nuanced world of facility managers, contracting companies, and their technicians, is the fact that well over 50% of ServiceChannel’s clients came as referrals from existing users. ServiceChannel is now in use by hundreds of large companies, managing greater than 100,000 facility locations and is used by over 50,000 contracting companies. The company enjoys a historical 98% customer retention rate.

My experience as an investor in ServiceChannel is indicative of why, as an angel investor, I like founders who are deep domain experts. To validate my instinct, I gave my colleague Jennifer, David Kidder’s book, “The Startup Playbook”, and asked her to chart the backgrounds of the 40 CEOs profiled. She found that 18 of the entrepreneurs had deep domain experience (over 5 years in the space) and 7 had some domain experience. Of these 25, only 5 had some technical experience in addition – like Steven – but considered themselves industry experts more than technical founders.

How about you? Would you put your money on a technical founder or a deep domain expert? Have you identified something that could be a business? Is it a problem someone might pay to solve?