Why is that the Problem?

A simple tool inspired by your favorite 3-year-old for deeply understanding a problem

January 17, 2024 • Reading Time: 9 minutes

Why?

Between the age of 2 - 5, kids tend to constantly ask one of the most powerful questions in the English language: “Why?”

This question is a natural overflow of their curiosity and limited experience in the world.

It’s comical to watch the exhausted parent attempt to address the child’s onslaught of questions (though perhaps less comical to be that parent).

There’s a lot to learn from this example.

Today, we’ll continue last week’s discussion on startup problems by exploring how asking “why” can yield progressively deeper insights about the problem a startup is focused on solving.

The Observer Express

Don’t have time to read the entire post right now? No worries, here are the main points:

  1. Introducing the Five Whys.

  2. Applying the Five Why’s to startup due diligence.

  3. A PitchFact example.

  4. The Five Whys forces 2 things: Thinking and Research.

The Five Whys

A century ago, Sakichi Toyoda, the legendary founder of Toyota Industries Corporation, turned the curiosity of a child into a powerful framework he called “The Five Whys.” He stated that “by repeating why five times, the nature of the problem as well as its solution becomes clear."

It’s a powerful Root Cause Analysis (RCA) tool in nearly every operational consultant’s toolbox and has remained a core principle of Toyota’s world-famous Toyota Production System for many years.

Using the tool is as simple as it sounds: identify a problem, then ask “Why?” five times.

Here’s an example.

It’s Cold in the House

  1. As I wrote this, I realized it’s too cold in the house. Why?

  2. Because the thermostat is set to 62 degrees and it’s very cold outside. Why? 

  3. Because the thermostat is on “eco” mode. Why? 

  4. Because the thermostat does not recognize I’m at home, which should cause it to engage “comfort” mode. Why? 

  5. Because the “location sensing” toggle switch is off for my cell phone.

Solution → Switch on the “location sensing” toggle switch for my cell phone.

Now, how does this apply to startup diligence?

Five Whys in Startup Due Diligence

Last week I stated that “A problem is the pain, discomfort, or dissatisfaction that comes from a human need or desire going unfulfilled,” and that understanding it well provides three primary benefits:

  1. Establish a baseline for defining who the target customer is.

  2. Critically evaluate whether the solution is appropriate.

  3. Quickly assess the leadership team’s focus, buy-in, and research.

Early in discussions with an entrepreneur, a great tool for understanding a problem is the 3-Step Problem Confirmation tool. However, as interest builds in an opportunity, I believe the Five Whys is a fantastic tool for driving a deeper understanding of the problem. It naturally peels back multiple layers of thinking, and forces both the investor and entrepreneur to consider what is actually the problem on an increasingly fundamental level.

For entrepreneurs, this can also be an effective tool to use on a regular basis for self-assessing and refining the core problem statement and any other offshoot problems.

Here’s an example I recently completed for PitchFact.

The PitchFact Problem: Due Diligence is Hard

  1. Performing due diligence (DD) on pre-seed and seed-stage angel investments is time-consuming and difficult. Why? 

  2. Many non-institutional early-stage investors don’t have access to Venture Associate teams and institutional resources and are thus forced to perform DD themselves. Why?

  3. Hiring a dedicated analyst team costs more and takes more time than it’s worth in the eyes of many non-institutional early-stage investors. Why?

  4. The individual check size and overall volume of non-institutional investments at the pre-seed and seed stage is often too small to warrant setting up a dedicated analyst team. Why?

  5. MBA level Venture Analyst salaries are $100K+ per year in the US, and investors are willing to spend no more than 3-5% of their investment on closing costs (which includes diligence), so forming a dedicated team only makes sense once an investor deploys $3 million+ per year.

It Forces Thinking + Research.

I believe this is a powerful diligence tool because it forces two things: Thinking and Research.

  1. ThinkingIs the problem the entrepreneur is talking about really the problem? If not, then what is? It’s easy to trust a founder’s expertise in an area, but performing this exercise (either alone or with the entrepreneur) is extremely helpful for ensuring clear mental acuity around what the problem actually is instead of what at first blush appears to be the problem.

  2. ResearchHow did I know the thermostat was set to eco, that my phone’s location setting was off, or that investors would spend no more than 3-5% on closing costs? Because I did some research. The Five Whys forces that. To draw accurate conclusions, performing research and collecting relevant data is essential. Entrepreneurs often have this data on hand based on their experience and work so far, and asking “Why?” can help draw out those valuable data points (or the lack thereof).

Final Thoughts

The Five Whys framework is equally powerful in startup diligence as it is in operations consulting. It can be applied in simple or complex scenarios and forces an investor and an entrepreneur to think and research about what the problem really is.

What do you think?

Have you ever used the Five Whys to evaluate a startup’s problem? If not - why?😉

Weekly Observations: 3 Lessons Learned

  1. Humble honesty gets the loudest cheer.👏This week I was honored to serve for the 3rd time as a panelist for the Entrepreneurship Bootcamp for Veterans 60-second pitch, where I heard two dozen veterans pitch their business. This year, one leader’s presentation stood out: Ryan Pappas. After a week of learning business concepts and analyzing his business, Ryan realized that his existing plan was unsustainable and he needed to pivot. So, instead of making something up or presenting a vision he didn’t believe in, he stood before 30 people and told it like it was. And you know what? His honesty was met with a standing ovation and the loudest cheers of the night.

  2. Someone has to lead.👑Leadership is vulnerable. It involves sticking your neck out, taking the heat for mistakes or dissatisfaction, and prioritizing the needs of those under one’s care. I’ve seen thoughtful leadership on display through a half dozen leaders around me this week - I’m both honored and inspired.

  3. Hiring long » Hiring wrong.🕰️This week I listened to the Founder’s podcast episode about Charlie Munger, which I highly recommend. At the end (last 20m), David Senra shared a compendium of takeaways from a variety of entrepreneurs about hiring “A-players”, and how important this is to the long-term health of a startup. We’ve recently begun expanding the PitchFact team, and are still working through filling a couple of roles. I’ve found myself feeling a bit frustrated/disappointed by the strictness (and resultant “slowness”) of my own process, but this short highlight reel from some of history’s greatest entrepreneurs was incredibly validating that hiring long is FAR better than hiring wrong.

Weekly Links: 3 Things I Found Interesting

Thanks for reading, have a great week.

-Andrew

If you enjoyed this post, please share it with a friend, colleague, or anyone else who may benefit.

P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.

How did I do this week?

About Me

I cultivate flourishing.

I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.