Customers Are King!
Posted on March 30, 2022 by Bob Fitts, One of Thousands of Business Coaches on Noomii.
There are many reasons why startups should focus more on raising revenue than raising capital
Most startups that I interact with are very focused on trying to meet investors and raise capital from VC funds. Too often that focus is too early in the lifecycle of the company and too often it competes with what I think is the more important focus on generating revenue. I have never once – never – had a random startup ask me if I could introduce them to a potential customer, particularly in the abstract, but the requests for ideas on which VC funds to pursue or for introductions to specific funds or investors are too many to count. That is telling and plain wrong as nothing should be more important to most startups than generating a dollar of revenue and here’s why.
Every dollar of revenue generated is a dollar of funding that doesn’t have to be raised – Sometimes what should be obvious isn’t obvious to all. Each dollar generated is one more dollar offsetting your burn. More revenues, slower burn, longer runway.
A dollar of revenue is worth more than a dollar of investment – Every dollar of revenue is worth several multiples of itself as valuations are often based on multiples of revenues. If businesses in your vertical are valued at 3 or 5 or 10 times revenue, then each dollar of sales you generate is worth 3 or 5 or 10 times itself once you do raise capital. This also means that the longer you can withstand raising expensive capital as your revenues rise, the higher your valuation and the better your pricing once you do.
You probably don’t know who you will be when you grow up – You may think you know what you want your company to do one day, but it’s very likely that’s not what it will end up doing and that you will pivot for a bazillion different reasons and nearly all of them have to do with something learned while interacting with customers and learning what they want and what they are willing to pay for. Think Google, AirBnB, etc., all pivoted to what they are today. Figure out what it takes to get someone to pay you to do something that is related to your product as soon as possible. Ideally, it is recurring revenue and your customer acquisition costs are sustainable long-term, but even that can be fixed potentially over time and even if not, the current revenue generator can buy you time and fund your primary business for awhile. Or market one use case to begin generating revenue and interest to fund the others. But in any case, listen to what your potential, actual and past customers are telling you and respond accordingly to generate revenue. There is nothing more important for you to focus on and there are no more valuable interactions that you can have than with your market as eventually all companies exist to sell something.
Constraints can be healthy – Unless you are in Silicon Valley, where pre-revenue valuations are incredible and pre-revenue investment is the norm, you’re probably not operating in a capital market that is either going to invest pre-revenue or that will give your business much of a pre-revenue valuation. It’s possible to find some milestone oriented, fixed valuation funds or some angel groups who will, but it’s not a deep market, so pricing will not be to your advantage. The paradox of ramen noodle funding is that it forces creativity. Counterintuitively, you may be better off with friends and family money and bootstrapping it longer for the cultural and creative benefits that lots of money will wash away without necessarily getting you any permanently closer to long-term success.
The Perfect is the Enemy of the Good – A recent client I consulted has ruined two startups by being brilliant at raising lots of money, being inefficient in developing the products/businesses, taking forever to launch as they tried to perfect the product first, getting stuck with huge pre-money valuations since so much time and money had already been invested, forcing investors in both companies into down rounds and now both companies are shuttered and it’s highly unlikely they’ll ever raise money in that particular market ever again. Pick your development methodology of choice – Lean, Agile, etc. – and make sure your business development methodology adheres to similar principles of iteration, rapid prototyping, and customer-centric solutions. The faster you get to market, the faster you get to revenue generation, the faster your company is on a path to sustainability. Speed does not kill in this situation. Get going and iterate, iterate, iterate!
Unless you’ve developed society altering IP whose value is apparent to all, the likelihood of the success of your business eventually comes down to (1) recognizing a business problem that needs to be solved, (2) recognizing that that problem is large enough in scale to be worth pursuing, (3) developing the technology and business processes to solve that problem in a novel way and, most importantly, (4) creating a customer service culture that is unparalleled by the dozens of other companies that are pursuing this same solution. The energy of the organization must be on figuring out how to satisfy the customer and make their interaction with your company as pleasing to them as possible as, ultimately, that is what makes any company successful. And the benefits are clear – longer runway, better valuation, better product market fit and a better, self-reinforcing, valuable and sustainable customer-centric culture. So, follow the customers and investors will follow you. Customers are king!
