MGV’S Kevin Lynch: The ‘Greatest Common Problems’ Framework for Finding the Next Unicorns

ABSTRACT

KEY POINTS FROM KEVIN LYNCH'S POV

Why is the Greatest Common Problems such an important paradigm going forward?

• The framework helps founders and investors identify and exploit massive market opportunities. “I look for founders that have identified a way to centralize key elements of big problems,” says Lynch. “Greatest Common Problems exist where the expertise needed to solve them lies outside of a specific industry’s mission or hiring ability. Companies that can identify and solve these GCPs will have an accelerating comparative advantage in large markets and will have an immediate and lucrative impact.”
• Solutions to GCPs help companies shift headcount and priorities to more strategic advantages, Lynch argues. Before Stripe, for example, a COO would need to spend a disproportionate amount of time setting up a company’s payment networks, but now they can integrate with Stripe very quickly. “It might be a little more expensive in the long run,” Lynch adds, “but they don’t have to outlay that much capital to get up and running. And it’s only expensive if things are working, since Stripe charges via API calls.” Twilio, likewise, allowed companies to focus more on customer experience and less on building out phone and texting infrastructure.
• The continued penetration of tech into industries that are historically tech-averse is the natural tailwind for the GCP framework. Lynch cites the construction industry as a perennial example of a category ripe for these type of solutions: “A lot of investors forget that for every very clever tech solution that makes sense for a highly digitized industry, there’s ten other hyper-specific, multi-billion dollar industries that don’t have tech solutions built for them because they’re just not very tech-forward or because they’re just not tech-adjacent. Over the last 5 years we’ve seen dozens of multi-billion dollar companies emerge in unexpected categories.”

What are some of the potential roadblocks?

• There is naturally resistance among some tech-adverse industries to digital solutions. “There are still many organizations that represent high-friction environments for the adoption of the tools they need to compete or even survive in their industries,” Lynch says. He cites the continued prevalence of fax machines in the insurance industry as a prominent example of how difficult it is to change rooted practices.
• Large companies also have a natural bias toward thinking that they can solve GCPs internally, especially if industry talent is unfamiliar with tech-centric or hybrid solutions. “If they don’t know how to build a technology product from the ground up,” Lynch says, “it is very hard to slap a tech solution on to an old product and almost impossible to reorient a team to run efficiently as a hybrid company that straddles tech and no-tech approaches. If you don’t have tech talent that grows up in that software-enabled environment and understands the problems and opportunities, it is very hard to have that same cycle that happens with, for example, ex-Google and ex-Facebook employees pollinating the tech space.”

IN THE INVESTOR’S OWN WORDS

There’s always a new norm being set in the tech industry and there’s always a new paradigm shift happening. Some of these shifts may be big industry or market shifts and some may be very technical infrastructure-level changes.

The key is to ride these shifts, but not take your eye off the ball when it comes to identifying deep pain points that emerge and create large market opportunities.

More often than not, these problems don’t line up with the current thing in terms of investing, or the category that is thought to be venture-backable at the time.

Twilio, for example, wouldn’t have been a big focus for a venture capitalist at the time if that investor was trying to find the next big direct-to-consumer company. But the tech industry is always evolving and improving on itself and finding new ways to solve every other industry’s problems.

It’s all very cyclical. Shopify, to cite another example, came in and took over an entire industry. Virtually every single small, online merchant hopped on from whatever they were using before to building the majority of their infrastructure on Shopify.

But now, the small- and medium-sized retailer faces a new set of problems. What are those? We’ve spun up a whole other slew of problems. These, in turn, will spawn the next generation of tech companies that wouldn’t have been possible before, because that older solution — in this case, Shopify — didn’t exist

The key is to find the people who actually feel those problems and then try to figure out what the deep underlying pain point is there, and if it can be fixed on a large scale.

MORE Q&A

Q:  How will companies utilizing a GCP framework monetize, what are a few of the dominant business models?
A: This is really an industry-specific question, since GCPs can be solved with many different approaches and underlying business models. Broadly speaking, as a fund, we look for companies that are able to build strong recurring revenue with a low marginal cost of acquiring a customer.

Q:  What do other market participants or observers misunderstand about succeeding within this framework?
A: You can have a perfect product and a beautiful brand — but if you don’t do the little things right like sales and ops, you can’t build a huge business. There are plenty of amazing founders out there with great ideas and amazing products, but the ones that build billion-dollar companies find partners, like MGV, that can help them build out the infrastructure necessary to scale their businesses.

Q:  As an investor, are you more interested in companies tackling GCPs in more tech-resistant industries or do you prefer to work in a company where digitization is already well advanced?
A: We help folks try to figure out their sales and go-to-market strategy, so this is an ever-present question. I don’t think there’s a good answer. If you go into a more tech-resistant industry, you’ve got more headwinds as we’ve discussed, but more potential upside. But, you have to figure out a way to solve a problem that those folks care about and lay out a simple solution which makes sense economically, because it will save them a lot of money. Whereas if you’re working in a tech-centric industry it’s much easier to explain the tech piece. You do have to isolate a specific category and sell to a market that is actually there, and ideally, is still underserved.

Q: Are there cases or industries in which a GCP framework is not the best starting point?
A: Sure, if you are building in a sector where the specificity of solutions means there are very few clients that can benefit, it becomes more difficult. It’s a lot harder for an industry like, say, the energy sector. Perhaps in climate tech there may be areas that can be tractable to broad solutions with a large potential market. But if, for example, you’re specifically trying to build something for PG&E it’s tricky, because you also have the issue of what’s venture-scale at that point if you’re building a specific solution for one company. However those opportunities tend to filter themselves out fast because of the small market sizes.”

Q:  Can you give us an example of a company in your portfolio that has utilized the GCP framework?
A: We’ve got one company, Leap, that’s doing very well right now, as retail struggles with staffing and training issues post-COVID. Leap comes in and helps direct-to-consumer brands manage their retail locations.

Nowadays, you don’t really need much infrastructure to run the online shop, so you want to focus on marketing. Or, for example, on how to position your product. If you’re a team of 10, where two of them are ops and finance and the rest are focused on design and production, you don’t really want to hire somebody to focus on your retail footprint and then hire people on the books to run the cash register, figure out how to train them, etcetera. You don’t want to take your marketing manager’s time away from scaling on other channels in order to figure out how to run a literal retail store. If you run a shoe company, you design and manufacture and try to sell shoes, and you want to keep the focus there.

So Leap came in and said, you send us some initial work on how you want the store to feel, how you want people to be trained, the content you want them to be able to convey to the customers, and they build a whole solution around running the physical retail stores, and they loop that in with whatever systems their clients are using for online sales. At that point, all the brand has to do is send them inventory and Leap sends them back the cash. Operationally, the brand doesn’t have to think about their retail presence and can run it as if it is just another distribution channel, which is a huge problem taken off their hands.

WHAT ELSE TO WATCH FOR

• The market is not quite ready for AI-powered solutions to GCPs, according to Lynch. For example, “there have been many startups that have promised to apply AI to marketing spend and I don’t know any of them that have lasted very long,” he says. AI is not mature enough yet to generalize a narrow solution into one that can solve a broad business problem. As we draw closer to General Intelligence models, this may change. Until then, most companies should think about AI as a complementary technology and not as the core value proposition.
• Look for no-code and low-code solutions to have continued success when applied to GCPs. “The most important tailwind for solving GCPs are the no- and low-code solutions, automating technical work for non-technical workers,” he argues. As discussed above, simplicity is a hallmark of successful attacks on GCPs and in many contexts the ability to train non-technical people easily will unlock large markets for tech-led or tech-enabled solutions.

STARTUPS MENTIONED IN THIS BRIEF

Stripe, Leap