In this first two-part episode, Trax cofounder and chairman Joel Bar-El and McKinsey senior partner and Israel Tech Hub leader Jay Jubas talk about how entrepreneurs can tackle the challenges they typically face when launching a start-up.
Peleg Dekalo: It’s a pleasure having both of you here, it really is, gentlemen. And why won’t we start from a quick introduction? Joel, you want to start?
Joel Bar-El: Yeah. Sure. I’m Joel Bar-El. The former CEO, we just spoke about it, the executive chairman at Trax, formerly the CEO and still the founder—one of the founders.
Peleg Dekalo: Beautiful. And outside of Trax, you also provide entrepreneurs with guidance and mentorship—you mind telling us about that?
Joel Bar-El: Yeah, I mean, I’m helping multiple, I would say, start-ups in the early stages that like to get some guidance and some mentorship. They come to me and I’m doing it very happily and I’m not charging anything for it, by the way. I’m just doing it because I enjoy it, and I just love to see those companies succeed and grow and touch wood. So far, everybody that I touched is still growing and succeeding.
Peleg Dekalo: Jay, your turn.
Jay Jubas: My name is Jay Jubas. And I am the coleader of Fuel by McKinsey, which is McKinsey’s division that works with start-ups. Our mission is to help start-ups scale much faster than they would by themselves, by injecting the kind of fuel that McKinsey can bring to it.
Peleg Dekalo: Great. So today we want to speak about entrepreneurship and the challenges involved with entrepreneurship. And I figured that the best way that we’ll do it will be by practice. So, we’re going to found a company. We’re going to scale it. We’re going to make it grow. And hopefully, we’re going to exit in the end of this session. I know that it sounds challenging, but we make the rules so it will happen.
Jay Jubas: It’s even faster than Gorillas.
Peleg Dekalo: Exactly.
Joel Bar-El: We should exit in the end, for sure.
Peleg Dekalo: Yeah. And we will speak about that, about our exit strategy. Let’s start from the inception. And Joel, let me refer to you. We have a solution. We founded a company. We have a product, it means that we have an initial hypothesis about our product, about the market, about the demand for our product, for our solution. How would we verify those assumptions that we have?
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Step one: identify the problem you want to solve
Joel Bar-El: Yeah. I think the one word you didn’t mention in everything we have is a problem or a pain. And I think every start-up should start there. You’d never want to be in a place where you have a solution looking for a problem. It’s much better to have a problem and then look for a solution. I think that’s kind of the first step, is to really find the business pain that is hurting enough for people to pay to solve it. And then verify that your solution and your product, and everything you think you’ve built actually can solve that pain for paying clients.
Peleg Dekalo: And it sounds like something that you come across a lot.
Joel Bar-El: Actually, I just came to this podcast recording from exactly the same meeting where I was presented with a solution and we tried to find the problem.
Peleg Dekalo: So, your advice is to start from the problem—from the pain point?
Joel Bar-El: Yes. First and foremost.
Peleg Dekalo: So, we have the problem, okay? We started there. And we have a solution for it. How do we verify our assumptions? How do we see if what we have as a solution is actually needed in the market?
Joel Bar-El: It was just a few days ago, I think, it was the Memorial Day for 9/11. And on 9/11, I don’t know if you know, there were three Israelis that were killed. One of them was Hagay Shefi, who was the CEO at SunGard when I was managing director. He was my mentor at the time. And that was 20 years ago—more than that. And he taught me only one sentence that I remember. People tell you a lot of things as mentors. But at the end of the day, you remember probably one. And he told me, ‘Money talks, bullshit walks,’ which is a great sentence if you think about it in many perspectives, and it applies to your question. That’s the only way that I know to really verify a product-market fit. You need to find somebody who is willing to pay for it. If somebody pays for it, doesn’t have to be a lot of money. It doesn’t have to be tens or hundreds of thousands of dollars. But if somebody pays real money for it, it means that there is pain that is lucrative enough for them to pay for. And that’s the test that you should do.
How much is it worth to solve this problem?
Jay Jubas: Even in my experience, because I’ve seen many, many business plans from early-stage companies, and I agree a hundred percent with Joel. The ones that are most successful are the ones that describe a problem in a quantified sense. They can say that the problem is this big—a Fortune 500 company typically spends X hundreds of millions, tens of millions, single-digit millions, whatever it is, says, ‘I’m struggling with this. And this is the problem I’m trying to address.’
And if they can articulate it in a quantified way, then it’s much easier to then go back and try to say, ‘How much is it worth to the company to solve? And therefore, how might I price my solution?’ And then you can test the thesis by seeing whether you’re getting that kind of traction. You can get that kind of price that is relevant for the magnitude of the problem that’s being solved.
Joel Bar-El: And it doesn’t have to be at the beginning of small company. It doesn’t have to be a check written on their name. It’s enough to get a memorandum of understanding, a nonbinding letter of intent, Laughing out loud [LoI], even an email to say, ‘Hey, if you solve that problem, I’m willing to pay you X amount because that is what it’s worth for me.’ That is a good enough validation to know there is real substance behind it.
Peleg Dekalo:So, I’m happy to tell you, gentlemen, that our product is succeeding and it’s receiving initial traction. People are willing to spend money on it and we’re able to prove it. Now, how do we form a strategy to penetrate the market?
Your business plan has to be simple
Joel Bar-El: From my experience, there is not one strategy. There are different strategies. You have product strategy, you have corporate strategy, you have a market positioning, you have business model, which has its own strategy. So, there are different angles to look at. I think that from an overall perspective, I would say one of the most critical points is the business model. What is the way to quantify the problem you are solving in order to maximize the revenues that you receive from your clients and to make sure that the business model resonates well with what public markets conceived as the best value for your corporate?
Today, it’s all about SaaS, but in history, it wasn’t like that, and maybe in the future it’ll be different. So, building a business model—that is aligned with clients’ interests and also with market perception—I think is key because as you scale and grow, it’s very difficult to change the model itself. Once you set a price point, once you set a way by which you are monetizing your product in a market, it’s very difficult to change it because the market already kind of cements itself over that kind of model. So, I would look at that as the first strategy, the problem to tackle.
Jay Jubas: The only thing I might add to that, and I 100 percent agree, is: it’s got to be simple. Everyone needs to have a simple business model, but particularly early-stage companies. A start-up needs to be able to articulate its solution very, very clearly, describe the value it’s going to create, and have a pricing model that’s easy to understand. And that’s really the foundation of the business model to a large extent. And if it’s not simple, they just won’t get any traction. So, simplicity is key.
Joel Bar-El: Yeah. The other strategy I would look at is the go-to-market. What are the channels for which you are kind of trying to access your target clients? And this is somewhere where you can fail. I wouldn’t encourage you to fail, but it’s not the end of the world to try one go-to-market strategy. If it fails, go to another, etc. And then it depends on the product, depends on the target clients, whether you work via distributors, direct sales, whether you do it online or with physical presence. But there are many go-to-market strategies. But that’s, I would say, the second thing after the business model.
Peleg Dekalo: And Jay, you both mentioned pricing. And as Joel said, once you set a price point it is difficult to change it since your target audience has gotten used to it. So, formulating a pricing plan is a tricky task, and it’s a challenge that we help our clients with. Do you mind telling us how this magic happens? What is the research that we apply to help our clients in forming the optimal pricing plan?
Jay Jubas: Sure. Let me start by describing. When we say pricing, it’s more than what we charge. It’s also how we charge. It’s how we package the various elements of our offering into an offering to a customer. So, we may have an offering that has many, many different pieces of functionality.
The first step, to some extent, is to understand: ‘What are the different ways I can package those elements of that offering in a way that would make sense to a customer?’ In a way that customer will immediately get, ‘Here’s my basic offering. Here’s the more advanced offering. I see the incremental value of going from one to the other.’ So, we have to start with some notion of, ‘How do I package the different elements of my offering in a way that will make sense to a customer and in a way that a salesperson can easily articulate what the differences are between various elements of that offering?’ Then one has to come up with a structure for that, meaning what is the metric that’s going to determine how the price is going to be set? If it’s software, is it going to be based on the number of users? Is it going to be based on some other metric? So, choosing the metric that aligns with the value it’s going to create for the customer is also a very, very important part of it. And then it’s the level that you’re going to have. So, it’s packaging, it’s structure, and it’s level. And really, there’s no secret to doing it well other than having a deep understanding of your customer. So, the more you speak to customers—and it’s got to be many, many customers because customers differ in how they like to buy, how they articulate needs, how they perceive benefits—the better you will do in coming up with the right answer or the optimal answer for these various dimensions of pricing. So, we encourage companies to spend time speaking to customers, understanding customers, understanding what they perceive the benefits to be, what they are willing to pay, what their other alternatives are, how they pay, what kind of pressures they might have in terms of speed to earn a return on that investment. [There are] a number of things that they really need to understand from customers before they can really align on an optimal pricing model.
Peleg Dekalo: Speak with customers and perhaps perform some deep dives into the company’s data and apply the right analytics to extract relevant insight.
Jay Jubas: Absolutely. I mean, so if it’s early stage, there tends to not be a lot of data to mine, but as they mature, absolutely. And those are the corrections that can be made with customers and data is another form of customer input, ultimately.
Joel Bar-El: Yeah. I would add to that, also, it’s good that your pricing will align with the budgetary structure of your clients. I can give you an example. In Trax, our cost was really about processing images. So, at the beginning, we charged per image, but clients did not know how to eat that. I mean, how could I put in my budget number of images? How would that resonate to my business?
And then we ask them, ‘Okay, what is your business and structure in terms of budgetary?’ and they say, ‘Hey, one of our budget items is how much it costs us to do a store visit because they visit those physical stores in a normal cadence.’ And we said, ‘Fine, we will charge you per store visit, and you can add that cost into your store-visit cost, and we can show you how we save money on your store -visit cost and how we increment the value of your store-visit performance.’ That immediately aligned, and it was easy to go to the next step.
Jay Jubas: It’s a beautiful example about this structure point. The metric you choose to base your pricing on needs to align with the customer’s value, not with your own cost structure. That’s a perfect example, and you only learned that by talking to customers.
Joel Bar-El: Exactly.
Peleg Dekalo: Okay so, we talked about strategy. We have it all figured out
Jay Jubas: We’re doing well?
Seeking investors? Double down on your pitch deck
Peleg Dekalo: Now we need some funds, don’t you think?
Jay Jubas: We need funds to grow and invest in growth.
Peleg Dekalo: Yeah, so. Okay, I want to be CEO. Can I be CEO?
Joel Bar-El: Yeah, sure. Go ahead.
Peleg Dekalo: Thank you so much.
Joel Bar-El: We have no ego in our company.
Peleg Dekalo: Okay. So, Joel, from your experience, I need guidance before I go to the [investor] angels. Maybe if it’s earlier, friends and family, maybe if it’s later, then micro-venture capitals [VCs], venture capitals [VCs]. Give me some guidance, please.
Joel Bar-El: I can give you a few pointers. Obviously, I can elaborate and talk about it. A lot of the things I’m doing every day in advising small start-ups and other bigger companies. I would say the first word I would tell you as a CEO is dilution. Maybe not just as your hat as a CEO, also as a founder of this company we just created. Just forget about dilution. Just think about what is best for your company, not what is best for you.
Normally, what is best for your company eventually will also be good for you. And I’m saying that because I saw a few companies that are going to raise debt rather than equity in terms of raising funds. Some of them benefited from that to some extent. I saw many others that just bankrupt because, at the beginning, it’s very difficult for a company to predict revenue streams, to predict number of clients, to predict any financial metrics. And then the lenders, more often than not, if they see their debt is at risk, immediately pull the plug and the company dies. So that’s one thing.
The second thing: I would tell you to focus very much on the presentation; that it should not include more than ten slides. And it’s not just the technical thing. The investors you are going to meet are very short in their time span and attention span. You need to come across with the message—what you want to show—within three to five minutes max. And probably within the first minute, what the value proposition is, what you’re trying to solve in this world. So, by concising the presentation, you’re actually working your brain on how to articulate the message in a very concise manner. Lots of pictures, very little words in this presentation.
The one word that I’m always telling people to think about is ‘narrative.’ You need to convey a narrative. Nobody remembers numbers. Nobody remembers facts. Unless they’re great copywriters, they probably won’t remember your company name or your name, but they will remember the narrative. You are doing X. You are doing Y. That narrative will stick, and if the narrative makes sense, the whole investment thesis makes sense. And when you think about the narrative, the narrative should answer one question and one question only. It’s a very difficult question to answer, but once you answer it, the whole thing of approaching investors to raise funds will be easier.
The one question is, ‘What is my company doing better for this world? How do I make the world a better place?’ That is the narrative. This is how the presentation will be built. What’s the situation in the world now? How do I solve it? How do I make the world a better place? That’s it, three slides, and you can sell anything. And that’s kind of my recommendation.
Peleg Dekalo: Jay, what Joel mentioned as narrative, we oftentimes call in McKinsey ‘storytelling,’ and we all know how storytelling is important, not just in that business problem of getting funds from a venture capital [VC] or a private equity [PE] or whatever the entity may be. Storytelling is important in every business problem that you have. So, why won’t we speak about that with our binoculars aimed at funding rounds?
Jay Jubas: Sure. Well, I mean, Joel captured the essence of it, which is people have a tendency to make their stories too complicated. And I liked very much his reduction to three slides. It should be a very simple, the story needs to be clear. People do not have a big attention span. They see lots and lots of decks. The story needs to grab them, exactly as Joel said, in the first few minutes.
The hardest thing I’ve ever done, even in a competitive proposal, is when I was told, ‘Your pitch can only have one page.’ Because everyone can write a long document with lots of data and lots of analysis. It’s very easy to do. The hard part is to reduce a problem and a solution and a story to its essence and communicate it all in one page—one page, two pages. And that takes a lot of work. And that takes a lot of thought and road testing.
Peleg Dekalo: That’s a very iterative process.
Jay Jubas: Absolutely. I imagine Joel has seen many cases where the same pitch gets refined and refined. The first investor who sees the pitch sees something quite different than the last investor, right? People get better with rehearsing and getting feedback from investors, and that pitch needs to evolve.
Peleg Dekalo: So to sum up, in each and every iteration we should try to clean up our story from superfluous complexities and basically make sure that the narrative is simple and understandable.
Jay Jubas: Reduce the narrative to its simplest elements: the problem, the solution, the enthusiasm, the team that’s going to be successful. I mean, those are the core elements of a story. And if you can communicate that in the first three to five minutes, you have a chance. If it takes you much too long to communicate it, you’ve got a problem. I was speaking yesterday with a company. I don’t want to mention the name. And they describe themselves as a little bit of snowflake and a little bit of this company, a little bit of that company.
And I told the guy, I said, ‘This is not an investable story, it is way too complicated.’ It was a relatively early-stage company, kind of like ours, a few million dollars annual recurring revenue [ARR]. And yet they had elements of three very, very different business models. It was too complicated a story. And maybe they have the technology to deliver and all those things, but my instinct, in this case, was, don’t even talk about all these things; find the simplest articulation of what you do.
It may not be 100 percent of what you do. And bet your story on that simple articulation, and over time, you can expand on it. But I think people have an urge because they’re brilliant people, they have a lot of ideas, they want to communicate all of it. And that’s an instinct that needs to be challenged. Simple, simple, simple. You’ve got a solution to a big problem, and your solution is unique, and you are the person who’s going to deliver it, make it happen.
Peleg Dekalo: It’s funny and counterintuitive that making things simple is way harder than to show a complex theory or story. But we see it every day. I’m sure that you see it every day as well Joel.
Joel Bar-El: Yeah, of course.
Jay Jubas: I was a physicist in graduate school, I have a PhD in physics. I remember I gave a talk once. And a guy said to me, ‘This was the first talk I understood.’ Because the culture was, if other people can understand your talk, you’re probably not that smart. And that was the mindset. And I wasn’t that smart, so it was very easy to make my talk very clear. But that’s when it dawned on me that people think, their ego is invested in showing how smart they are and how nuanced they are, and that doesn’t work with an audience.
Joel Bar-El: Einstein used to say that if you can’t articulate something in two or three simple sentences, you probably doesn’t understand it.
Peleg Dekalo: Yeah, that’s a great saying by Einstein. He had some great sayings.
Jay Jubas: And Einstein’s papers. I’ve read many of his papers, they’re short papers. Brilliant. Very short.
Peleg Dekalo: I wonder if he could have succeeded as an entrepreneur.
Jay Jubas: Well, there are other characteristics that are required of entrepreneurs, so.
Know your investors, and choose carefully
Peleg Dekalo: Yeah, that is for the next episode. One last thing. We finalized our deal with our investors and they just became shareholders in our company. Now, what should we expect from our relationship with them?
Joel Bar-El: I think that you make few choices in life, right? You choose your life partner. And that is a very kind of articulative, right, a very big decision we make. We go to dates and we examine, and we go along together before we choose who to go to bed with. And then after that, you choose your founders, right, the partners into the start-up. So, I think investors are no different. Yes, you have less dating time and less face time, but you need to choose them very carefully.
I would encourage people not to be shy and not to think bad of themselves if they do due diligence over their investors and call other companies they invested at and ask, ‘How did they behave?’ Not when everything goes well. You need the investors only when things go bad. If everything goes well, who cares who the investors are?
Investors will praise you, will do parties, and everything will be fine. If something goes wrong, then you want to meet your investors and then you want to know, how do they behave? Do they take you to litigation? Or do they support you emotionally and financially to come across the problem? So, I think choosing the investors, that’s the main thing. If you chose them correctly, later on, they will be partners and true contributors to your success.
Peleg Dekalo: Great to see you crossing the finish line of this first part. In the next episode, we’re picking up the pace and starting to chase substantial scale and growth for our start-up. After achieving that desired growth, we’ll discuss why, when, and how should we exit. See you in the second part of this episode.