Is your startup a slot machine?
There’s a big difference between getting lucky and building predictable revenue.
B.F. Skinner was a psychologist, behaviorist, and professor at Harvard. He did a lot of work around how to train animals (and people) to behave certain ways. We’ve all heard of positive reinforcement, and you might imagine that the best way to get someone to do something is to give them a dollar every time they do it.
It turns out this isn’t true. A much better way is to only give them a payout every once in a while, and to make it random. This is called intermittent reinforcement, and you can learn about it here and here.
An example of this is a slot machine. Or your mobile phone, which you may find yourself checking all the time to see if you have a new text or email. Most of the time you don’t, but sometimes you do. You never know when you’ll be rewarded, so you build a habit of always looking even though you’re usually disappointed. Those intermittent payoffs feel great!
Skinner discovered that if you know you’ll have a new text message every time you check your phone, you’ll actually check less.
What does this have to do with your startup?
A founder called me all excited because his company just landed a big sale. They had been working on it for months. It feels great, right? He’s justifiably happy.
I congratulated him. And then I asked him what his pipeline looks like and what does he estimate his revenue will be next month. He doesn’t know.
And that’s a problem.
Because that means it’s not a sustainable business. What’s worse, though, is that he now has positive feedback that compells him to keep trying. He made a big sale! So his mind is telling him it’s working even though the data is telling him it’s not. He keeps playing the slot machine even though he loses most of the time.
He told me he wants to spend a bunch of money mass-producing his product so he can get better margins on his next sale. I talked him out of this because he doesn’t know when (or even if) there will be another sale. It’s startup suicide to spend precious capital on inventory that may just sit there.
A working business has reliable, predictable revenue coming in on a regular basis. If it’s hit-or-miss then you can’t plan, and it’s difficult to grow. If you’re doing any kind of sales then you need to have a lot of irons in the fire, and you need to get good at estimating when they will close and for how much money. This requires having someone whose full-time job is closing deals. Or a steady flow of people downloading your app.
Your sales pipeline allows you to predict the future.
If you’re just getting lucky every once in a while then things will probably get worse over time rather than better.
Written by Mike Lingle, if you like this then follow my journey as I help startups start up.