“Throwing money at a problem doesn’t solve it”
I was consulting with a pre-revenue startup that was paying tens thousands of dollars per month to vendors. The good news was that they could afford to pay my full rate. The bad news was…not for long!
Two of the vendors were building the website in WordPress, and making it look difficult. The project ran longer and cost more than expected, and my client wasn’t happy with the finished product. So they immediately hired a different vendor to redo it.
In the meantime the startup was paying a PR firm a monthly retainer to do…nothing…while they waited for the site to go live. What’s interesting is that once the site launched the PR firm recommended gathering stories to create a physical book—which could have been done while the site was under construction. Sigh.
All this before figuring out how to make money.
The punchline to this story is that when the site finally launched people didn’t engage and the revenue didn’t start flowing. There had been no attempt to confirm product / market fit (more evidence that if you build it they won’t come). So it was back to the drawing board to figure out how to engage an audience.
And the business was way under water before it even started.
It reminds me of a guy I knew who wanted to open a restaurant. He convinced a billionaire to give him millions and he built out the most amazing space you can imagine and hired a world-class chef. I had some spectacular meals there. His restaurant did well, but not well enough to make back the initial investment. So it was a zombie and eventually it died.
After which my friend opened a simple, inexpensive place and proceeded to make more money.
I look at a lot of business plans. Most of them ask for money in order to figure out the problem. Just like the website and the restaurant. So I’ve learned to avoid them.
You can try spending a bunch of money to solve your problems. You can even try spending a bunch of investor money to solve your problems. But it’s hard to make that work. I got the title for this post from an article about how Damon John from Shark Tank learned this lesson the hard (and expensive) way.
The business plans that appeal to me are the ones where the founders have figured out how to get customers using limited resources. They’re already in motion on a small scale, and now they want to grow. They’re providing value and building a community. They’re finding product / market fit.
Sometimes they can tell me how much it costs to acquire a customer, how long that customer sticks around, the lifetime value of that customer, and how much it costs to service that customer. Maybe they have one market where their business model is working. Maybe they’re actually making money on each sale.
It’s hard work figuring out how to make a profit on each customer. But that’s how you build a sustainable business and learn to control your own destiny. And if you do it right you can scale it.
But only after you figure out how to deliver value to one customer at a time.
Written by Mike Lingle, if you like this then follow my journey as I help startups start up.