I was speaking with an accountant friend last week about a few of his client companies and whether they may be a fit for our fund at StartFast. As we dove further into the discussion I recognized that my friend, like most people, no matter how smart they are or how extensive their background in business is, will often prematurely jump to the conclusion that a business is scalable without really checking all of the boxes. So for all the early-stage founders, advisors, professional services providers and investors out there I thought I'd put out a short list of characteristics that in my experience I've found to be necessary for a business to actually be scalable. I would encourage all to think about how this lists applies to your current business or even better how it applies to an idea you have for a new business before you actually launch it.
Now I'm going to start with a disclaimer that this is not a comprehensive list of all things important to building a great business. We are narrowly focused on a few of the most important common traits that make a business potentially scalable. Also, in the absence of first-hand market data, many of these points are somewhat subjective. Two people may see come to two different conclusions about one of these points. Nevertheless, if you're trying to evaluate whether an opportunity you are considering pursuing, currently pursuing, or are evaluating for investment COULD BE scalable, here is a list of ten main criteria to consider.
1. Is this truly a "need to have" not a "nice to have" value proposition?
This typically means you are directly solving a top 1-3 problem or need for your customer; definitely so in a B2B case. This also means your offering can deliver relatively significant value for the customer not just a minimal benefit. In the best cases your customers would describe you as truly disrupting the status quo or changing the industry. The stronger your value proposition and the higher a priority it is for your customer the easier it will be to get their attention and make the sale.
2. Is the novelty of the business and technology limited to one or two items?
Believe it or not this is actually a good thing. Too much new tends to put people off, create unnecessary friction in sales, causes confusion among customers, or creates a lot of problems satisfying other points on the list. Once the customer feels you can deliver the value proposition your goal is to minimize the number of potential objections. If you have a great product but have unnecessarily introduced a unique business model the customer is not used to, you've made your job harder not easier.
3. Is there a very specific initial target customer that is easily identifiable?
Specific meaning that you can characterize the ideal customer in very narrow terms. For an extreme example "every coffee shop" is obviously too broad for an initial target market. "every coffee shop that uses square" may still be too broad whereas "every coffee shop in Albuquerque" is too restrictive and probably not a relevant way to characterize the customer. You're looking for the right balance. The low hanging fruit. Large enough to be attractive but also specific enough that it becomes easier to satisfy the points below.
4. Is the initial target market >$500M or $1B?
This part is just pure math. Another problem with "every coffee shop in Albuquerque" is that it would also be too small of a market. If you believe in Geoffrey Moore's technology adoption curve, then only 2% of any market will be "innovators" and only 13% will be "early adopters". Compound that with typical sales conversion rates and your pricing model and suddenly you start to realize just how big of a market you really need to have a shot at building a big business.
5. Do the unit economics offer very high margins and strong cash flows?
High margins meaning 80%+ type of gross margins. This means that each customer is highly profitable based on how much it costs you to service them. Strong cash flows is more related to your ability to capture those strong gross margins easily and quickly. Time delays and payment processing are enemies to scalable businesses. This is why recurring subscription payments that simply charge a credit card or withdraw from a bank account are so valuable.
6. Is the ability to market to customers repeatable and predictable?
Repeatable meaning: you know who the customer is, how to find them, how to sell them, how to on-board them, and how to keep them in a rinse and repeat fashion. It has become something you can begin to wrap a process around and delegate in a semi-machine-like prescriptive format. (This is why point # 3 was important.) Furthermore you know there are a lot more potential customers out there you can apply this process too and can predict with reasonable accuracy based on past results, how deploying $X more to sales and marketing will lead to $Y more in revenues.
7. Is the sales cycle cost efficient and relatively short?
Cost efficient means the ratio of $Y to $X (from #6) is at least 3-4. It also means that the cost to acquire a single customer, at least in the early days of the business, isn't a stratospheric number in the $100K's or greater. It may be one day, but if that's what it takes to get customers # 1-10 you're in trouble. A relatively short sales cycle meaning relative to the size of any one customer you can acquire them quickly. For an enterprise customer short might still be measured in months where as for a consumer focused product it might be measured in minutes or seconds. This is about maximizing monthly revenue over sales cycle time. A $100K/year customer that takes 3 months to acquire is much better than a $1K/year customer that takes 1 month.
8. Is the ability to on-board and "service" customers highly or fully automated?
This is a criteria often forgot about until the company is already servicing customers. Founders can often get so hyper focused on brining cash into the business that they forget to step back and view their business from a 3rd party perspective. You may have even checked every single box until this point but then find that after you acquire a customer your entire schedule is being devoted to servicing that customer. If that's the case then I'm sorry to be the one to tell you that what you have is not a tech company but a professional services business. In fact its worse then that because you'll be charging lower product-level prices while still providing the high-cost professional service. Now apply criteria 5 and 6 to your operations. If these aren't true then you can't truly scale your company in a fast and cost efficient manner. You need to be able to provide your product or service to your customer in a highly automated manner (again relatively speaking).
9. Is there an inherent "stickiness" built in to ensure repeat customers?
This can sometimes be the largest "hidden cost" of your customers, their tendency to churn. All of your effort and money spent to market to, acquire, and service a customer is thrown out the window the moment they decide to cancel their subscription or no longer be a repeat customer. The goal is to find a way to make your product inherently sticky and constantly creating value. A few common roadblocks: a product that's only needed irregularly like tax prep, a product without any switching cost, or a product that delivers all of it's value after the first use. A great example of this working well is a company called Dashlane. They store all of your passwords under one master. To make sure all of the passwords you're storing are safe, a new, unique, and encrypted one is created for each service so that not even Dashlane can identify any one particular password. That means there are huge switching costs for canceling because you would need to do a password reset for every one of your services!
10. Is competition (from the eyes of the customer) minimal and do you have an advantage that will allow you to grab market share faster?
Notice the qualifier "from the eyes of the customer". This is because a competitor that you never actually compete for business with is not really a near-term competitor. If your customer does not view them as an alternative to your product then even if it might seem to the layman that you are competitors in reality you are probably targeting different problems or different customer segments. Making sure you are competing against very few to no true alternatives is key to scaling the business fast and cost efficiently. Furthermore, ensuring you have an advantage relative those competitors that will allow you to grab market share faster is also vital. This may be a first mover advantage or it may be growth hack as discussed in "How to outrun your competitors".
StartFast is a unique value-add pre-seed venture firm
The first thing you're likely to read when you come to our website is the following "experienced founders solving real problems for real customers". That phrase did not come about by accident but rather from our own customer discovery. As much as we might struggle to do so at times, we do eat our own dog food here. After 100's of conversations with founders over the years we recognized there was a growing community of founders who don't fit the stereotypical Silicon Valley startup mold. These are founders that are poorly served by most early-stage investment models and frankly look at most accelerators and say "I'm too old for that shit".
When we launched StartFast in 2012 we saw how the Internet didn't just open up new markets for companies but also opened up the ability for investors and founders to work together across geographies. You can now both invest in and launch companies from anywhere. We also recognized from our own experience that with the growth in new tech company formation, founders required more than just capital to really get their companies off the ground. They also need to be plugged into a network that can help them build their team, advise, and guide them to develop a repeatable scalable growth model.
All of these things still hold true today nearly 8 years after we started. What's new and where we've pivoted in the past few years is that rather than focusing on chasing the same group of founders as everyone else, we are actually best suited to support the growing community of experienced founders solving real problems for real customers. We completely understand that there continues to be a huge amount of young startup founders flocking to the top tier startup hubs with new social media apps. We also recognize that 80% of VC money still goes into 5 major metros (44% between San Francisco & San Jose, 16% in New York City, 12% in Boston, and 8% in LA) The thing is though there are a lot of experienced founders outside those cities who have recognized real problems, where there are real customers willing to pay big bucks to solves those problems. The challenge for those founders is if you live outside the major hubs and even you have 5, 10, or even 20 years of industry experience it can still be difficult to build a successful, investor backed tech company.
To support those founders we've built StartFast as a value-add pre-seed venture firm that can bring more to the table than just cash. We like to come in once you've gotten your idea an inch off the ground; you have a committed and well-rounded team, you've built a minimal viable product, and you've started generating some revenue ($5K/month recurring tells us you are on to something). Despite any business plan you may have written beforehand though, it feels like you can't quite figure out where the gas pedal is. How do you go from this small trickle of revenue growing slow and steady to getting on the proverbial hockey stick trajectory everyone talks about?
Well if that sounds all too familiar to you, we're looking for new investments. Click the application button below to tell us more about what you're working on. If it makes sense we'll reach out and have a conversation.
Why raising VC shouldn’t be sexy
As of this writing in November 2019 venture capital dollars are cheaper than they have been in a while. Partially as a result of that, there’s a growing trend among early-stage founders to chase too much capital too early and above all else. My perspective is, while it might seem super sexy to raise big venture capital dollars, money is just one tool to achieve your true end goal: GROWTH.
I meet with founders all of the time where it seems like raising money isn’t so much a means to an end but in fact the “end” itself. This is not something any founder would openly admit to but their behavior, their choice of words, and frankly what they prioritize when speaking to investors make it abundantly clear what their true perspective is.
In my opinion the question you really want to answer when speaking to an investor is not “how big of a check will you write me?” it’s “what can you do to help my company grow to the next level as quickly as possible?”
Those are actually two very different questions. If they were the same it would mean money is the only thing that will allow your company to grow. The reality is, money is often a necessary but not sufficient ingredient for quick growth.
Perhaps the most common circumstance I see this happening is when a founding team is trying to raise too much money at too high of a valuation without any first hand supporting data behind their growth plan. In many ways the business is entirely theoretical at this point and the founders have convinced themselves that there’s no risk of their plan not working so all they need is a big fat investment check and the company will start taking off like a rocket. If they somehow are able to convince enough investors to write checks at this point, more often then not all they end up doing is accelerating the company off a cliff to it’s demise.
The underlying driving force is really two fold:
It’s really easy for founders perceptions of how far along they are to get way ahead of the reality.founders too often only care about the size check an investor is willing to write and not nearly enough about what else they can bring to the table to help the company get to the next level faster.
Raising money under either circumstance is a bad idea. At best you’ll spend a lot of money learning what doesn’t work the hard way and at worst you’ll cut short the life of a company that might have otherwise had a chance. Instead of focusing on the check size, focus on the total value being added by each person you’re considering adding to your cap table. Capital is definitely an important part but getting to the next level takes a lot more than that.
Founders can't afford to wait to find a business model
When you're just starting out there are some problems that honestly need to wait. There's no sense in freaking out about whether your tech will scale to 1,000 customers when you don't know whether you can even get a single customer to buy first. In 2004 it would have been pointless for Zuckerberg to halt the launch of Facebook until he figured out what to say in a theoretical congressional testimony. I've noticed however a lot of entrepreneurs still continue to wait to figure out a feasible business model until after they've built a big enough user base or have a sizable number of free trials underway. It's worrisome because while there are many problems that can wait 'til later, figuring out whether or not you can make money is not one of them.
There are a couple of different kinds of businesses where this can happen. Probably the most common are B2B2C companies that are trying to leverage a large user base to create value. I'll preface this by saying I totally understand that some of the most valuable companies in the world use this type of business model but they are really more the exception than the rule.
The most common gripe people tend to have with this type of business model is that it requires you to burn a ton of cash in the beginning all the while hoping to build a large enough user base so that you can begin to monetize it. It's much more appealing from a financial standpoint to start making money on day 1.
The problem I have though goes beyond just cashflow. The challenge is that you can spend all of that time and money building a user base only to then find out you don't even have a feasible business model. In other words, what if you build this huge base of "free" users but then find out no business customer is willing to pay to get access to it? You may be able to switch to a freemium model and start charging users but that can be a bitter pill to swallow. Assuming you can pull it off, chances are you'll see a huge drop of in users and a significant loss in your company's valuation.
The better solution is to start testing your business model from day 1. If you can't find a way to make money from the beginning with high gross margins you're heading for an uphill battle. In that case your go vs no-go decision may have less to do with whether or not you can get "users" to actually use your product so much as whether or not the pot of gold at the end of the rainbow is big enough to be worth the journey.
Founder's only get one chance at a first impression
Most of you have probably heard that age-old saying "you only get one chance at a first impression." While you can debate it's merits when applied generally, when it comes to a founder's first impression with various potential stakeholders (customers, employees, partners, investors, advisors, etc.) it can be quite applicable. It sounds like a very trivial topic but honestly you often get one shot to describe your company to people and many founders are throwing that opportunity away with simple mistakes.
I remember when I had launched my solar company it took me a while to learn this lesson. When I first got started, every-time I was asked what it was we did my answer was "We've developed a combined heat and power concentrated photovoltaic system that can extract heat 7X better than the current industry standard." Needless to say most people looked at me like I had two heads. Even if they did think the tech was cool they inevitably followed up with "Okay so what's the point?" That sucks.
That sucks because you only have a few seconds to grab someone's attention. Many times founders may not even be aware of the first impression they made on someone. Investors pass on companies all of the time based purely on pitch decks, websites, Crunchbase profiles, etc. without ever speaking to the founders.
Truth be told, part of the reason I failed to connect was because at that time I was a pretentious founder. Mostly however it was because I was looking at this the wrong way. Like most founders I never really gave much thought to what the goal was. What I was doing instead was 1) trying to sound intelligent 2) trying to strike a balance between being comprehensive & concise. If you do that however, what you end up with is something that comes off very esoteric and verbose. (see the irony in that word choice?)
So why is it that I, like many founder's, failed to grab people interest even when the company may have the potential to do so? It's because the goal of communicating is not to solidify the fictitious intellectual hierarchy in your head. Neither is it to be overly comprehensive at the expense of being coherent.
The goal of a founder's first impression is simply to grab the person's interest.
You are not going to sell someone based on an elevator pitch. You are not going to get their investment, and you are not going to get anyone worthwhile to sign as an employee either. Much like with a resume' all you are looking for in that first impression is to grab their interest enough so that you can lead them into an engaging conversation. The goal is not for them to declare your genius it is for them to say "Hmm that's interesting. Tell me more".
The way you do that is not with academic statements like "We've created a blockchain based artificial intelligence platform to digest hyper-contextualized data from digital transformation companies." It's through storytelling. Think about this, nearly every major religion in history tends to have some kind of central text. How does that text communicate the message? Through stories.
When you connect your audience with the story of your customer, it creates a natural sense of empathy. Almost no one is going to instantly "get it" and start nerding out on the tech with you. You need to tell the story from the customer's perspective beginning with the problem they have and then how your product makes their lives so much better. If that isn't described in a clear and engaging manner within the first 30 seconds you've lost them.
How to outrun your competitors
The term "growth hack" has unfortunately fallen a little out of fashion in 2019. Now-a-days it's just as synonymous with A/B testing of digital ads as it is with anything else. I actually think if you apply the concept of "growth hacking" to the business as a whole as opposed to a specific marketing campaign (as with A/B testing) then the term begins to have a more profound meaning. Growth hacking as I would define it "is a disruptive business's ability to leverage the inherent advantages of their business model and technology to accelerate sales growth and dramatically outpace competitors."
So what does that really mean? Let's take a very broad example of a company providing an IoT product designed to save customers money on their operations. The company's primary innovation is a solution that allows them to dramatically reduce the hardware, install, and integration costs of getting a solution up and running.
Many entrepreneurs will take a very amateurish perspective on their competitive landscape where the argument basically boils down to "our tech is better than their tech". More sophisticated entrepreneurs will be slightly more objective by viewing their competitive advantages in real terms and weaving them into their pitch "our product has significantly lower installation and integration costs than do competitors". An entrepreneur with a growth hacking mindset will instead see their competitive advantage as an opportunity to make moves their competitions simply can't and therefore outrun them. They'll say our implementation costs are low so to prove our value to customers, we'll pay for the install and IT setup for a small pilot project. If we meet preset performance goals, customers will automatically be put on a subscription plan and negotiations will start for a company wide expansion.
Now I know that sounds like just a simple "free trial" but it's not. For one, if the implementation costs are normally cost prohibitive then the concept of a free trial likely doesn't exists for this market the way it does for many freemium software services. Your competitors can't offer that same ability or if they can they certainly can't do it at the same scale you can. Additionally, the plan above still requires some level of customer buy-in so you're not just handing over the software hoping they'll like it. You're using the pilot as a carrot to accelerate the enterprise sale and get decision makers to make faster decisions.
If you're going to build a high growth business you can't approach your sales and marketing strategies the same way you would as a Fortune 500 or your competitors would. Sure adding the cost of a pilot implementation to your cost of acquisition is not something to take lightly. But if this is executed intelligently, it could deliver a huge ROI.
The revenue from a full company wide install is so large that it's worth the investment to make it happen sooner. It allows you to greatly accelerate an otherwise long sales cycle and to penetrate the market much faster than your competitors ever could. You're not trying to maximize bottom line profit right now, you're trying to maximize revenue over time (i.e. growth) This game is about speed to market dominance and the best way to achieve it is for founders to reexamine their competitive advantage to see if underneath there's a growth hack.
How market leaders can drive disruption that new entrants can't
In last week's post "When your tech roadmap gets too far ahead of your business" I discussed how the best path to rapid growth often begins with intense focus on your core business until you can solidify yourself as the market leader. Once that beachhead has been formed, the door to new growth opportunities begins to open up but it's not just in terms of new features or related product lines. Those can be justifiable paths to growth but the real value tends to be created when companies can leverage their position as the market leader to drive additional disruption.
Let's take a very salient example Amazon who has in many ways perfected this art. In 2016 Amazon Web Services (AWS) accounted for 150% of Amazon's operating income. In other words, AWS effectively subsidized losses from Amazon's enormous ecommerce business. AWS however was basically made possible because in the early 2000's Amazon needed better hosting infrastructure to keep up with their incredible growth. They then decided to leverage the infrastructure as a side business and today it's the world's largest cloud infrastructure company. Amazon did they same thing with their fulfillment centers allowing other ecommerce businesses to leverage the infrastructure and deliver 2 day shipping with Amazon Fulfillment Services.
In the cases above Amazon leveraged their position not just as the ecommerce market leader but in many ways as a leader of all Internet based businesses to drive new disruption. But it doesn't take Amazon levels of success for this concept to hold true so let's look at this from a more down to earth perspective. As I've discussed in previous posts such as "What makes a tech company valuable?" there are two common ways in which companies can leverage their position as market leader to drive additional disruption.
Aggregating and analyzing data across your customer baseEstablishing yourself as a new sales channel
Aggregating data is something that can come natural to marketplace or SaaS businesses. Once you have enough activity or customers that they now represent a statistically significant portion of the overall potential market, you can now collect and analyze meaningful data about how that market works. Let's take a theoretical example: a marketplace for commercial real estate. With enough transaction activity flowing through, you know have potential for predictive power that could be very valuable to the people listing on your marketplace such as: who is likely to rent, what time of year, what is a competitive rent for your space, what's the most unique selling point, who are the best realtors for this type of space, etc.
Establishing yourself as a new sales channel can be equally valuable. Let's imagine you built a business to Uberize cleaning services and nannies. If you become the go-to place to bring them new work and if you become a trusted software to help them run their business, you have now established yourself as an incredibly strong sales channel to that customer base. That could be something very valuable to an acquirer but it can also be leveraged to sell additional products into that market which you would not have been able to otherwise such as subscription cleaning supplies.
The point is, growth opportunities in disruptive Internet businesses are not the same as they are in most corporate environments. Simply adding features and complimentary products can help continue growth but smart founders find a way to continue disrupting the market by leveraging their position as market leaders to do so. An added benefit to that strategy is that it creates further moats to protect against competition who cannot offer those same new services because they lack the market position to do so.
When your tech roadmap gets too far ahead of your business
On every entrepreneurial team there is at least one "idea person". This person is often "the creative" or "the techie" but not always. They are the dreamers thinking about how big this company could be and all of the vertical & horizontal ways it could grow. They are the type of founder popular culture tends to idealize. This person is important and that skill is a necessity for the team's success but if it isn't harnessed correctly it can also become the root cause of failure.
That's because the formation of ideas will always outpace their execution in the marketplace.
It is orders of magnitude easier to come up with "great ideas" than it is to test their viability in the market and build a business around them. This should really come as no surprise. It's a very common occurrence even for people outside of the entrepreneurial community. How many times have you heard a relative say "That's a great idea! You should go on Shark Tank!" 99.99% of those ideas never become real because of a lack of execution.
The same holds true within a company as well. As an early-stage company it's important to consider questions like "how big could this be?" and "as we grow how can we find opportunity to accelerate our value?" The challenge is those questions can often be confused with "what other products should we offer?"or "what other markets can we go after?"
The latter two questions are very different in a startup context for one really important reason: they create distraction. Entrepreneurs are often to quick to introduce new products or go after new markets before they've really tested their core business and built a foundation to support the execution of new offerings. I see too many technology roadmaps that show the team developing 3 new products all at the same time and releasing them before they've really established themselves as the market leader.
Business school thinking will support that theory for growth. If you want to dominate, introduce more products and expand into more markets. If you're GE or Motorola then that can be a viable strategy. If you're a new company with 0 - 1000 customers then it's a recipe for distraction and slowing growth. When you're in hyper growth mode, everyone on your team is focused on getting the football down the field as quickly as possible. When you start introducing new products or markets too quickly, you're now asking them to run down the field while juggling multiple balls at once. What do you think will happen? They slow down. Believe it or not, I also see this just as often from companies that are so early they have neither a big team nor customers! That means rather than a team juggling all of those balls, you're forcing just a couple of founders to do it. How fast do you think you'll be able to run?
The better strategy is to maintain focus on the growth of your core business until you've begun to establish yourself as the market leader. When it becomes clear you are on your way to dominance, that you have a significant customer base, and that you're generating significant cashflows to fund the R&D work you need done, you're now in a better position to think about those new growth opportunities.
That said, as I will talk about next week chances are the best opportunities will not come from the conventional mindset of "more features" and "additional customer segments" but by leveraging your new and growing market position to fuel additional disruption.
Customers care about the Business Problem not the Process Problem
I've recently started to find the concept of an executive summary (as opposed to a pitch deck) really appealing. I'll give a quick shout out to my friend Jason Tagler a GP at Camden Partners and the founder of Pitch Creator, who I credit for turning me on to this with Pitch Creator's use of the "Read Me Pitch".
I really like the fact that in an executive summary it's much easier to get a clear understanding of the business and gives the entrepreneur a greater ability to describe any one aspect of their business. One interesting trend I've begun to notice because of this however, is that many entrepreneurs (experienced ones included) often describe the problem they're solving in terms of process and opposed to the business level problem.
Let's use an example to describe what I mean here.
Here's a what a process problem description could look like: "Administrators are still focused on trying to organize all of their information and data using a mix of old spreadsheets and paper files. This is incredibly time consuming, inefficient, and results in incredibly poor and often delayed communication of that information with the rest of the company."
Here's how that same problem would be described from the business perspective: "Because administrators are currently unable to handle and effectively communicate with the rest of the company, the business lacks the organizational capacity to go after $X worth of new business opportunities each month."
Focusing on the process problem is much the same as having too great a focus on the tech. Founders get too into the weeds of how to build the most powerful technical solution to make the process more efficient all the while, forgetting why the customer actually cares about solving that problem in the first place.
From the perspective of the decision makers, likely executives/business owners in this case, if the problem is described in terms of process then the perceived benefits might be: you can hire less administrative staff, you can make sure files are easier to find, and you can make you employees happier because the process is simpler and the communication clearer. That's what is often referred to as a "nice to have" solution and is unlikely to really get the interest of the decision maker. They will always have a higher priority to focus their time on because the benefits of solving the process problem are not going to have a huge ROI for the business.
Framing the same circumstances in terms of the business problem is likely to yield a very different response from decision makers. Now the focus is less on the headache the status quo is causing administrators and more on the $X in additional business they are losing out on each month. If $X is relatively significant, especially compared with the risks/costs of your product, then it's likely to gain a lot more interest and rise significantly in the customer's priority list.
When it comes time to build your product it is inevitable that you will need to get into the weeds a bit to create a proper solution, but do not take your eye off the ball. At the end of the day the product is designed to solve the business problem not the process problem because that's what customers value and that's why investors will write checks.
Is your business model working for you or against you?
Having looked back at several recent posts I realized that when strung together these articles may be sending an unintended signal to founders: That the only focus a founder should have is bringing in more customers.
The reason so much time is spent on that is it tends to be the most existential problem facing early-stage companies. Every other problem you have is essentially theoretical if you don't have enough customers coming through the door. That being said, once you start to acquire new customers you cannot let that be your only focus. You also need to consider whether your business model is working for you or against you.
One aspect of your business model to consider is whether you're actually selling the same thing to each customer. Now I get that in the early days sometimes you may have to take on a few custom projects to get cash in the door, but that's not what's in question here. The question is, do you have a standard product offering or not? Some entrepreneurs will take the phrase "sell out of the back of an empty truck" a bit too literally and start selling anything to anyone. If you start to lose focus and consistency in terms of who you are selling to and what you are selling them, you can end up in a spot where you're business suddenly looks like a professional services business. You have hodgepodge of different types of customers all with different custom products. Worse yet, is if you don't treat them like custom products with custom prices, you're now selling professional services at product level prices. If that happens you aren't so much extending your runway as drastically cutting it short.
Let's say you're past that, the next thing to consider is whether your unit economics are in check. Founders very often will start out with pricing that's too low and not recognize how expensive it is to acquire a customer. They may simply fail to do the calculation or perhaps they're so early in implementing their customer acquisition strategy, they don't have enough data to get an accurate CAC number. The latter in and of itself is just a matter of being early in your development. Every company starts somewhere. The problem is when founders then decide to throw all of their money at top of the funnel activities when they don't yet know what the ROI is. So let's run through an example. Let's say you're selling a subscription service at $200 per month. Let's further say you've figured out a lead generation strategy and that if you were able to do the calculation it's actually costing you about $800 per lead. That means it takes 4 months to break even on each customer. If you aren't careful and if you don't have a big pile of cash sitting in your bank account, you can very quickly tie up all of your capital in expensive lead generation and create a really bad cash flow problem. Normally this can be a good reason to raise capital but raise with a plan to improve your unit economics so you can move faster.
The last aspect I'll touch on is sales cycle time. The sales cycle can be a tricky thing to figure out because it's something that can only be refined with practice and in the beginning you're often just trying to get enough shots on goal. The challenge is if you start pushing top of the funnel activities too quickly and too disproportionate to moving customers through the funnel you'll create a huge bottleneck in your sales funnel. This means that:
Many of those hot leads will drop out because they're tired of waiting. That further means all of the money you spent generating them is wasted and all of the potential revenue that could have been generated from them is never realized.You'll have cash flow problems similar to aspect #2. Top of the funnel activities tend to require cash upfront. That means until you close some of the customers that come into your funnel from those activities, the money you spent doing that is being tied up. Spend too much money brining in top of the funnel leads while taking too much time to move them through the rest of your funnel and soon you'll be hurting in a big way.
All together, this is basically an early lesson in attempting to scale to early in your development. Make sure your car is up to the task before stepping on the gas.