The importance of Customer Engagement, what counts as engagement and The LOI Fallacy
This is a guest post by Chris Mairs, Partner at Entrepreneur First, and follows on from The Letter of Intent Fallacy. Chris is Chief Scientist at Metaswitch Networks and is an active angel investor in the UK.
You must convince prospective investors that you can monetize your offering.
The best way to do this of course is to actually be generating Relevant Revenue. ‘Relevant’ here means revenue for the actual service you will provide and at a per unit amount not too dissimilar from the target in your business plan. Revenue for one off trials does not count as relevant revenue, but still has value in demonstrating engagement as per below.
A great way to generate Relevant Revenue is to lash up a proxy for your eventual product, but manually power it behind the scenes. This will burn money, but it allows you to measure and demonstrate what people will pay.
However, for some deep tech offerings, no amount of lashing up and manual power will deliver a credible proxy service. The more ‘magical’ the offering, the more challenging it will be to generate Relevant Revenue within a six month programme such as EF.
In that case, the best proxy for Relevant Revenue is customer engagement. In approximate descending order of importance for raising money, engagement could mean one or more of the following (not exhaustive) list:
- Paid proof of concept trial
- Unpaid trial with agreed success criteria and agreed route to paid deployment
- Access to sensitive or valuable data
- In depth requirements workshops
- Facility tours, invitations to present at conferences, free workspace
- Letter of Intent (LOI)
- Email expressing interest
You will see that LOIs and emails expressing interest (which teams often call LOIs) are right at the bottom of the list. This is not to say that they are entirely worthless, but simply that they have much less value than you might think and are absolutely not a substitute for the much more real forms of engagement further up the list.
There are two key reasons why customer engagement is such a good substitute if you cannot generate Relevant Revenue.
1. It demonstrates that the customer is in some sense paying for a relationship with you, which means they must think you have something potentially valuable to them. The payment could be real cash (e.g. for a paid trial or for travel to a conference), or it might be in the form of their own time or their own data/resources.
2. It gives you huge insight into the requirements that the customer has, the exact problem you need to fix and the challenges you will need to overcome in order to generate relevant revenue.
With regards to point 1, the main customer resource that goes into a formal LOI is the time of the customer’s legal department spent ensuring that the LOI does not commit them to actually doing anything with you. That’s why it’s called a Letter of Intent not a Contract for Services. Teams are often surprised and disappointed when LOIs don’t convert into revenue, but investors understand that LOIs are weak, non-binding documents and so will tend to discount them — even less resource goes into an email expressing interest. For such an email, the only resource is the customer’s credibility (not a trivial thing, but depending on how the email is written there may be very little reputation at risk).
With regards to point 2, you may have to invest quite a lot of effort getting an LOI, but it will not be increasing your understanding of the customer, which is the immense value that comes from the other forms of engagement higher up the list.
So, in summary, while endorsements from customers, either informal emails or LOIs, can be helpful, they are no substitute for much more extended, intense and valuable forms of customer engagement.
Read more about customer engagement here.
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