The Two Things Every Early Stage Company Must Have To Achieve “Actual Differentiation”

Hello to Canada’s SaaS Community,

Part of a founder’s job is figuring out which fires to put out, which to fan, and which to leave alone due to a lack of resources. For most early-stage companies, the global macroeconomic environment is the third case. Prashant Matta, Partner at Panache Ventures, shared more about why he’s not really worried about a possible recession and the two things every early-stage company needs to have before fundraising.

Key takeaways:

• Early-stage investing deals are still happening, even in down markets, but founders need to be more scrappy.
• When seeking investment, early-stage founders should be able to demonstrate a strong problem set and customer obsession, both of which lead toward product-market fit.
• Early-stage founders are largely insulated from macroeconomic events impacting public companies, so founders should focus on serving customers.

For startups thinking about a Pre-Seed or Seed round, that cash can feel all-important. Not only will it let you continue building but it might also literally put food on your table as the first small salary you draw.

But Prashant Matta, Partner at early-stage fund Panache Ventures, cautioned founders to ignore the hyped-up fundraising they saw in 2021 and early 2022. Instead, he wants early-stage founders to focus on two things.

It’s a great time to get scrappy

Prashant said he’s excited for the long-term but wary in the short term—a sentiment echoed by many investors in the Canadian tech ecosystem.

“Some of the sectors that continue to see a lot of investment activities: AI, of course, climate tech, and fintech continue to be strong,” said Prashant. “... Ecom, that's obviously flattened out. But overall, I'm still bullish in those sectors.”

Despite what he calls “headwinds” in the macroeconomic environment (think: inflation, interest rates, and recession risk), Prashant is clear that “now is a great time to build a company.” It’s just that founders have to be a “little bit more scrappy” to build out solid fundamentals rather than flashy pitch decks.

“There's a ton of opportunity long term,” said Prashant.

Building “actual differentiation” 

While public capital flows might be stretched thin, the venture capital world has been sitting on dry powder. Panache Ventures, for example, closed its $100 million second fund in September 2022 and is actively investing.

For early-stage companies, though, investors can’t always assess based on product-market fit.

“I’m talking pre-seed, early seed stage—most companies at those stages don't have product market fit,” said Prashant.

Prashant instead looks for two things:

1. A problem set: This is the general area that you’re trying to solve as an entrepreneur—the issue customers are facing and how you’re planning to fix it.

For Prashant, this is a time to assess not just if you understand the problem but if you’re passionate about it.

“You've got to focus on going deep in the problem set that you're passionate about and you're building your company's mission around,” said Prashant.

2. Customer obsession: This is the process of focusing on customer needs so deeply that you’re building a unique product, both technologically and in terms of distribution and go-to-market.

This is not the time to worry about pricing or inventing a new business model–Prashant said the SaaS world is pretty well-understood so you likely won’t create something totally new. Instead, a good problem set and customer obsession help you build “actual differentiation” in terms of your technology and how you connect with customers.

“Uniqueness is in technical advantage, it's not just about building IP around the business or a moat around the business,” said Prashant. “It's also how differentiated your product is and how differentiated your distribution is.”

Lean into “macro protection”

Prashant said early-stage founders, for the most part, are insulated from the recession-fearing, layoff-announcing news in much of the tech media.

Why? Timelines.

“If you're starting a company today and it'll take you a year or two years to get to product market fit–or maybe longer–we may be out of the current down cycle,” said Prashant.

Couple that with the fact that most venture capital funds have a 10-year lifecycle, and Prashant said he’s confident that early-stage deals will continue to happen (his confidence comes in part because Panache is actively investing its second fund).

He’s also optimistic that capital markets will bounce back; perhaps not to the sky-high levels of late 2020 and 2021, but back strong enough. And if that’s true, then early-stage founders have little to worry about beyond their own work.

“They can stop worrying too much about late-stage or public markets and just focus on finding product-market fit and obsessing with their customers' needs,” said Prashant.