As the cost of building and launching new products has plummeted, there's been a worldwide explosion in the number of new startups created each year. This creates a bottleneck at the top of the funnel where there are far more ideas in any given product category, chasing a finite market.
If you’re the gatekeeper of a portfolio, your first challenge becomes filling the top of your funnel with high-quality founders.
While overall success rates have remained the same, the top of the funnel has exploded. For this reason, many early-stage accelerators try only to accept ideas with the most traction. But even top accelerators are starting to get overwhelmed with low-quality applications, and they routinely miss good teams with bad applications.
For perspective, Y-Combinator received 20,000+ applications to fill 500 seats in their Winter 2022 cohort. Assuming each application had a 5-minute video, reviewing those videos would have required 1,600+ hours or 200+ working days!
In today’s issue, I’ll outline some strategies for building and nurturing the top of your funnel.
The early-stage game is won by finding the right teams (not ideas) before they have traction.
The key to any funnel optimization is improving:
- the top of the funnel (quality before quantity),
- the conversion rate between stages,
- time to conversion between stages.
I’m going to focus on the first one in this post and outline some tactical steps below:
1. Cast a wide-net
Good ideas can come from anywhere, and hybrid work is here to stay. If you want to find the best founders, cast a wider net.
Example: We attract founders from anywhere worldwide to participate in our 120-Day Startup program, which we run twice a year. We have put over 10,000 teams spanning the globe from over 25 countries.
2. Constrain your funnel
Publishing key qualifying criteria upfront, like your
- innovation thesis,
- minimum success criteria (MSC), and
- vertical focus (if any)
helps attract the right teams and repel the wrong ones.
Example: When we run programs for investor-backable businesses, we suggest setting the MSC to $10m ARR in 3 years. This single step causes applicants to level up and think bigger.
3. Flip the funnel
What separates successful startups today is new mindsets, not skillsets. Many teams already know how to build what they set out to build. Where they fail is building what customers want.
Rather than waiting for startups to enter your funnel before exposing them to these new mindsets, what if you did this before they applied:
Example: We give away our Foundations and Business Model Design playbooks to prospective applicants, allowing the more serious teams to level up and get better prepared. Yes, not everyone will do the work. But would you want those teams in your program anyway?
4. Standardize business modeling tools
In the early stages, founders struggle with getting others to see what they see. Simple modeling tools like the Lean Canvas help them deconstruct their ideas. Simple stress-testing steps help them refine their ideas for the better.
For you, standardizing business modeling tools opens the door to better scoring rubrics and pattern matching, which can help you rank and sort hundreds of models quickly.
Example: We standardize on three mental models:
- Lean Canvas for beliefs,
- Customer Factory for metrics and
- Customer Forces for insights.
5. Normalize on measures of progress
Traction is the one metric that rules them all. And every business should have a single traction metric. Once you normalize this metric against your target minimum success criteria (step 2), you can start comparing seemingly different business models (like B2B to B2C) with each other.
Example: We live by the traction roadmap in our programs for
- baselining teams,
- setting 90-day goals,
- formulating validation plans.
6. Require business model story pitches
Pitching is a key skill every founder needs to hone. This starts with the 5-minute application video. Being on the receiving end of many bad pitches prompted me to define a pitch format that became the Business Model Story pitch:
The Business Model story pitch replaces ad-hoc pitches with a more structured pitch that builds on all the mental models above.
Example: We always do a before and after story pitch in our programs to implant the power of clear and concise storytelling.
7. Measure the quality of founders, not ideas
Invest in the quality of your founder’s thinking processes, not their initial ideas. Good teams quickly vet good ideas from bad ones and move on to better ones. Bad teams manage to fumble good ideas or hold on to bad ideas for too long.
The best way to do this is to see them in action.
Example: We rely on a combination of activity metrics (like how often they update their Lean Canvas), scoring these activities, and coaching to measure the quality of founders.
8. Visualize your portfolio as a funnel
If you do all the seven steps above, taming your portfolio of dozens or hundreds of early-stage ideas becomes much more manageable.
Not only can you visualize your funnel holistically, but you can also drill down to the individual team level:
