In startup, the difference between survival and running out of runway always comes down to taking our eyes off revenue.
We don’t want to do this, and we certainly don’t do it on purpose. But when we’re in the middle of the startup run, it’s pretty easy to fall into a trap of wasting our time on feelgood tasks that seem like progress but don’t bring in any money.
No entrepreneur is immune to this trap, myself included. It’s part of the drive that makes the successful ones successful.
I’ve founded, worked at, and advised a ton of startups, and they usually make the same mistakes where revenue is concerned, whether they’re launching their first company or their fifth. And while every startup is different, there’s one universal fact:
The path to success starts with survival. The odds of survival depend on how fast you can get to revenue. The key to getting to revenue fast is to not do anything else but seek it out.
So here are the easiest traps to fall into, and how to sidestep them.
Raising money before you’re ready
No one gets into startup to do the ordinary. But if we want to do something extraordinary, we’re going to need a shitload of money to get it all done.
That doesn’t happen overnight. It happens in stages — sometimes long, mostly boring, completely scary stages. The problem is that we usually see, hear, and read about startup as an overnight success: Kid drops out of college, has a great idea, works on it for a couple months, then raises a few million dollars at a $1 billion valuation.
This is the trap: The lottery thing, but with pitch decks and spreadsheets.
Before we try to raise money, we need to establish that what we want to build will generate revenue. And raising money is not generating revenue.
Here’s what I usually advise to avoid this trap. You might need a few million to take a serious run at your dream company. Break it down into small pieces and raise just enough to get to that first revenue-generating piece. As a guide, think about how much of your own funds you can scrape together to put into your company. Multiply that by 10 and go raise that.
But even before that, figure out how you’re going to get to your first dollar of revenue and then build your deck, your financial model, and your pitch on repeating that process over and over.
Here’s the dirty secret: This is what almost all successful entrepreneurs do anyway, they just take bigger strides. It’s also the reason investors love repeat entrepreneurs, because those entrepreneurs just say, “Remember that time I made all that money? I’m going to do it again but a little different.”
My point is that unless you have a track record, you can’t do that — and believe me, it’s not that simple even when you DO have a couple exits under your belt. The more definitive your proof that revenue will be coming in, the better the chances you can raise (and not waste) investor funds.
Building out the company before the product
From business plans to business cards, founders can spend a lot of time dreaming and building their company before the first dollar is made. Here are some of the things startups don’t need before going after revenue:
- A website, a social media presence.
- A mission statement, a brand statement, a logo.
- A board of directors, an advisory board, a management team.
- A financial plan, a P&L statement.
- Office space, T-shits, stickers.
It’s not that a startup shouldn’t have these things. But how the initial revenue comes in will not only drastically alter whether or not those things are needed, but also what their true purpose is.
A common example of this trap is building out an amazing web app and then realizing all of the things that paying customers actually need are three or four clicks deep.
I get it though. The company building is all about establishment of legitimacy. The advice I usually give to avoid this trap goes like this:
You want to be an entrepreneur? Boom. You’re an entrepreneur. But no matter how cool your brand is or what your mission is or how far out your financial plan goes, you’re not really an entrepreneur until someone pays you money for something you’ve made. Everything will change when that happens, so make it happen early.
Hiring or teaming up before the idea is fully formed
I can’t exaggerate the number of times a startup co-founder has come to me with the lack-of-revenue issue and it turns out there’s like 12 people fighting over the strategy of a company that doesn’t have a single paying customer yet.
Look, startup can be hard to do alone. But for your own sanity, as well as the integrity of your vision, it makes sense to get as far as you can down the revenue road on your own.
You may not be a coder, but there are a number of SaaS tools that can get you to MVP. You may not be a financial expert, but most of us can wrangle a spreadsheet in the early days. You may not have sales magic, but if your idea is good enough, you’re probably the right person to get it into the hands of those first paying customers.
Yeah, it’s always easier building something with other people, except when it isn’t. There are priorities to juggle, schedules to wrangle, agreements to hammer out, decisions to get consensus on. Ugh. Believe me, especially in the early days, it can be much less of a headache to go it alone.
Mapping out the full infrastructure of the product before the first release
If we’re building a rocket, we need something we can launch into the air without it exploding. How far it flies, how it lands, its reusability, and what color it is don’t matter. Yet.
This is a trap that most repeat entrepreneurs get caught in, and I still fall for it. I know the true vision I want to build is not version 1, but version 5, and the trap I fall into is trying to build all 5 versions at once. In other words, before I launch, I plan for every use case in every scenario with multiple features across multiple customer segments.
My advice to avoid this trap is something I still tell myself on a weekly basis: Narrow it down, get to a small feature set for a small segment with manual steps. Then collect money, then figure out what the priorities are by where the money comes from and what breaks, then build the next feature.
Focusing on innovation before execution
A startup without innovation is a small business. But innovation without execution is just a great way to earn a doctorate degree.
Obviously, the trap here is to worry about innovation before building the product. Again, I raise my hand as having been guilty of this many times over, just not anymore.
My advice here is something I started doing about halfway through my career: If we want to innovate on a product, first we need to sell the product. If you’ve got a new way to mow lawns, start by selling regular lawnmowers. If you can’t sell a lawnmower, you can’t sell the lawnmower of the future.
Chasing a large number of customers before landing one
Almost everyone does this one, especially during the early stages. The trap here is trying to sell our MVP to hundreds or thousands or even millions of customers at once, tailoring the marketing, the pitch, and the price to a target we think might be somewhere in the middle of the curve.
This seems like a good way to get to revenue quickly, but it’s really just a flawed way to try to get to a lot of revenue. It’s also crazy expensive.
My advice here is to start with one customer, and sell the hell out of them. How that first customer gets sold and how they get onboarded and how they adopt the product and when they stop using it will all be lessons to learn.
Learn from customer number one, then go to 10 customers. Learn from them, then do 20, and so on, until we have definitive, repeatable, scalable revenue streams.
Then go innovate, launch new versions, hire the team, build the company, and, if you’re still interested, raise the money.