What's the differentiation?

At our Annual LP event in March, I gave a brief talk on my least favorite question in venture. This is a condensed, written version of that talk.

For all the time humans spend trying to find answers, we spend very little time figuring out whether the question we’re asking actually matters. A classic one that founders and PMs still ask is “How much would you pay for this?” even though it consistently gives static, shallow answers.

In venture, we have our own version:

“What is the differentiation?”

In theory, this question makes sense - the venture ecosystem is incredibly crowded, every successive market map has more startups in each box, and being skeptical always comes across as smarter and more polished than believing in a company’s potential.

However, much like “How much would you pay for this,” I believe it’s the wrong question to ask.

1. If you’re asking “What’s the differentiation,” you’ve likely decided you don’t like the company and are approaching the investment opportunity from a mindset of skepticism and pre-judgment

2. With such a simple question, you’re leaving little room for the nuances that can help you understand the past success and future potential of the startup

3. Most importantly, it belies a fundamental misunderstanding of “differentiation,” which is an output of success, not an input

And if you ask the wrong question, you’ll get the wrong answer:

Yes, this is an oversimplification, but these are real responses we heard. In case it wasn’t obvious, these are all IVP investments.

But people are wrong all the time. Does one mistake really matter? It absolutely does in venture, where extreme returns are possible, and one missed investment can be the difference between returning the fund or missing badly.

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So what should we be asking instead?

I think the right question will have three key characteristics:

1. Rooted in curiosity rather than judgment

2. Leaves room for the nuances that give you insight into the past success and future potential of the company

3. Focuses on the inputs to success, not the outputs

There are many questions that hit those three, but one I’ve come to like is:

“Why could ____ be a company of consequence?”¹

Let’s apply this to CrowdStrike. IVP was fortunate to lead the Series E when they were at ~$50M ARR.² It’s hard to believe in retrospect, but at the time most investors still had questions about their ability to stand out in a crowded market and compete with incumbents like Microsoft. In short, people were settling for asking “What’s the differentiation?”

But if you instead asked “Why could CrowdStrike be a company of consequence?” you’d hopefully notice the following:³

• George Kurtz was a visionary cybersecurity leader with deep domain expertise who cared intensely about both product and GTM

• The founding team had the nonconsensus perspective to centralize endpoint data which would allow for continuous improvement

• CrowdStrike’s culture was one of thoughtful, relentless execution combined with an intense customer focus

• The initial product was rapidly turning into a unified security platform as they added new modules to drive cross-sell and improve long-term margins

• Significant customer pull and expansion within a rapidly expanding market

Team, nonconsensus approach, culture, product, GTM. If you’ve worked at a startup, you know those are the true inputs to success that can be controlled and obsessed about on a weekly basis.⁴

And at least with CrowdStrike, the output is a company with true differentiation.

1. I certainly didn’t come up with “company of consequence.” It’s a phrase that’s been used in venture for a long time and credit really goes to Sapphire for helping others realize what a powerful description it is.

2. It’s now $3B+ ARR and in the S&P 500. I was not here when we made the investment, but there’s an infinite amount to be learned from their success.

3. You could argue that these are convenient descriptions only possible with hindsight or that investors could tell a similar story about dozens of companies that don’t succeed. I’d argue that they may not be sufficient for success, but they sure are necessary.

4. They’re also the factors that investors struggle to evaluate because (1) it’s hard to internalize from the outside, especially if you haven’t spent time seeing that dynamic firsthand; and (2) they usually don’t show up in the numbers until quarters, if not years, later.