What is a “hair-on-fire” problem? (1)
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What is a “hair-on-fire” problem? (1)

At a high level, my approach to investing is to back founders who have identified a “hair on fire” problem and who have the ability to ship quickly. I use this framework because I believe finding a high quality problem to solve and having the skills to solve it gives you an outsized chance of achieving product market fit. Below, I want to provide further explanation of what amounts to a hair on fire problem, how to find one and also share some examples from the portfolio.

What is a hair on fire problem?

My definition has two parts. The first is the need to identify a clear and deep pain point. There is obviously some subjectivity here, but without a buyer that has a clear willingness to pay and has attempted to solve the problem in the past (or is currently solving it poorly), you don’t have a deep pain point. I’m surprised how often founders delude themselves on this point, rushing to build solutions in search of problems.

The second part, which is less obvious, is the need for the solution to be radically better than the status quo. Something can be radically better than the status quo if:

  1. It generates net new revenue for customers (the best value prop!)
  2. It drastically cuts costs
  3. It generates 100x efficiency gains

Too often I find that entrepreneurs pick value propositions focused on generating time savings for customers. In my experience, unless the gains from time savings are orders of magnitude more than how things were previously done (and thus translate into topline or bottom line improvements), this doesn’t amount to a radical improvement. With AI, it is now possible to produce magical products and I would advise all prospective founders to think about how they can build something that helps customers make more money.

Examples of hair on fire problems (and radically better solutions)

Some examples from the portfolio below.

  • Collectwise uses AI to automate debt collection, a $35B market in the US. As a 6 month old startup, they’ve already 2x’d the collections rates of industry incumbents. These incumbents are 100+ year old companies that are unlikely to modernize their approach and tech stack, while Collectwise’s solution will only improve over time
  • Apriora is an AI interviewer, sold to recruiting firms to help them automate interviews. Automating initial screens drastically changes the cost structure of a recruiting firm. It allows them to place candidates faster (while keeping costs constant), and thus undertake more placements per year
  • HouseRx allows specialty doctors to dispense medication at the time of consultation. This opens up a new revenue stream that these doctors weren’t previously capturing
  • Revv uses AI to help auto shops automate vehicle research. Research automation is typically a time saving value proposition, but in this case it’s directly tied to to revenue generation. This is because Revv focuses on vehicle sensor repair procedures which are complex (i.e. take lots of time to research) and lucrative (generating $1K+ of high margin revenue per vehicle). Time saved doing research allows for more vehicles to be repaired and allows shops to make more money
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Revv’s primary pitch is to make body shops an additional $1,250 per job
  • Cline is an AI coding assistant. It turns tasks that took developers hours into minutes. Whilst this is a time saving value proposition, developer time is highly valuable and the efficiency gains are so stark that it easily meets the bar for radically better than the status quo
  • Cleva provides a USD bank account to African freelancers and businesses, allowing them to receive, save and spend in USD. Many African currencies are unstable and depreciating, so without tools like Cleva these businesses risk losing purchasing power
  • Exacare is an AI powered CRM for the senior care industry. CRMs typically do not solve hair on fire problems. However, Exacare’s AI functionality allows facilities to review 250+ page patient referral docs in 2 minutes (down from 45), quickly determining if a patient gets admitted. Facilities are bottlenecked by time spent on administrative processes, so Exacare’s product is revenue generative, cost reductive and frees up valuable time to focus on patients
  • Fay Nutrition allows consumers to meet with dietitians at zero cost. During Covid, telehealth consults with dietitians became covered under insurance. Fay identified this regulatory change and has been able to offer a service that was previously costly for free
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Tagline from Fay’s pricing page

How to find a hair on fire problem

As it stands, every industry is about to be transformed by AI, which means there are opportunities in nearly every sector - including offline and services industries. This is incredible news for entrepreneurs and means you can pick and choose where you want to play. (Anecdotally, our best performing portfolio companies found their opportunities in sectors where their family/friends worked in. This is a great place to hunt for problems).

My advice to finding a hair on fire problem is to focus on an old school industry where you have some affinity. The older the incumbents, the better (like in the debt collections example above). Within this industry, identify a manual workflow that is well suited to automation — noting that AI is already proficient at reading, writing, speaking, summarizing and listening. These components are core to many jobs. But before pursuing an idea, set yourself the goal of doing something 50x better than how it’s done today (the examples of Cline and Exacare above illustrate this well).

It doesn’t matter if the initial wedge seems niche or esoteric. In fact, the more hidden from sight the better. When you are building a solution that automates labor, you can tap into larger budgets than pure software. And typically if you solve the first problem well, customers share other problems to solve with you, expanding your market size.

If you are a team of technical founders who think you’ve hit upon a hair on fire problem, I’d love to hear from you at samit@1984.vc.