A warning to early-stage founders:
Avoid the POC death trap (1/2)
POCs or pilots — whatever you choose to call them today — are a rite of passage for many early-stage B2B startups for finding product-market fit. This is especially true for those focused on large enterprise and/or institutional customers (financial, healthcare, government, etc.), where sales cycles are often long and complex. The great news is that if you’re successful, they will pay you tens if not hundreds of thousands, if not millions of dollars per year. Navigating the best path to getting there is of course the real challenge.
Let’s say you’re an early-stage startup that’s recently raised a ~$2–4M seed round and are selling to enterprise, which is why your go to market involves POCs. You’ll probably be looking to raise a Series A in around 18–24 months, by which point, you’ll share the traction you’ve achieved to convince investors to provide a further $5–15M in funding; the better the traction and customer validation, the more likely you are to be able to raise at the upper range of that figure from your investor of choice.
You’ll get some flexibility on the ~$100K+ MRR mark that investors like to see in Series A SaaS businesses because of the sales cycle length and and an appreciation of the land and expand opportunity. That said, if all you can show is a handful of unpaid or low commercial value POCs (even from “logos”) with no proven conversion path to meaningful sales, the less likely you will be to raise a successful A round. The more realistic scenario is that you’ll be close to end of cash, scrambling around to get whatever funds you can to keep the lights on. And if you’re lucky enough to close $1M in seed extensions, you’ll probably have lost valuable time and momentum and may find it even more challenging to raise a Series A in another six or so month’s time. Welcome to the POC death trap.
Here are 5 ways to avoid this:
1. Stop calling them POCs. Today.
I have to give a hat tip to Eden Shohat for this, as this very point came up in a recent conversation we had. The term pilot or POC comes across as you’re running an experiment. This also gives the impression to customers that you’re not ready and to investors that POC customers aren’t actual customers. Of course your product isn’t fully commercially ready but you only want to engage with customers who have the need, budget, etc. to buy your product once you can quickly demonstrate that it delivers value. So call this the “pre-scale” phase rather than a POC or pilot. This isn’t semantics, they won’t signa . POC agreement, they’ll sign is a “pre-scale agreement.” This is how you do business and will provide a clearer path to a commercial agreement, weed out the time wasters and send a strong signal to investors that you have customers and are on track to significant revenues.
2. Focus on user adoption over logos
If you can get them — customer logos are great — they provide credibility and help gain the trust of other customers. The reality for most entrepreneurs is that you’re not going to get Bank of America as a customer in your first 12 months. It’s good to get logos to get on the radar of these companies who may become paying customers one day, but focus your energy on customers who are acutely feeling the pain that your product addresses and have a high likelihood of using it immediately. Take inbound leads seriously; a customer that is aware of their needs and proactively looking for a solution is much more likely to move forward faster. Understand if customers have bought new technologies recently — this is a great indicator that they’ll buy and use your product.
3. Build a clear upsell expectation and path
Keep the pre-scale phase to the minimum time required to prove value by having a defined start and end date with clear KPIs that customers are looking for. Look for friction points in the pre-scale phase and be creative about how you plan to remove these. Asking a customer to share data or a requirement to integrate with existing systems can lead to weeks of compliance and other work to get to launch, so look at alternatives. Understand what you’ll need to do to get both the pre-scale and commercial agreements across the line, i.e. cost and time, legal, compliance, technical integrations, etc. and looks for hacks to condense these wherever possible.
4. Don’t do anything for free
Unless you’ve raised a $5M+ seed round — turn away any enterprise customer that’s not willing to pay you. Being under the RFP threshold will help to remove friction here, but an enterprise customer that isn’t prepared to pay you a few thousand dollars for trying out your product is probably not going to work to your timeframe. The usage of your product at pre-scale is probably low so it might be appropriate to be charging professional service/setup fees (if you’re labour costs in onboarding them is high) or even to have a minimum fee that will go against future usage.
5. Establish consistent pricing early on
You should have a clear hypothesis of what value your product creates for customers and how much they should be willing to pay for it. I heard an interview with Amit Bendov, CEO and Founder of Gong where he recounts how he called up 50 VP Sales, told them what he was looking to build, asked if this was something they’d buy and how much they’d be willing to pay for it. Amit is a serial entrepreneur and you may not be (yet), but the point is that you need to establish the currency for your product early on and present it to potential customers confidently so they know you’re selling something real and not experimenting. [SIDE NOTE: I did a post on pricing here that may be helpful]
In my next post on this topic, I’ll be sharing details of what investors will be looking for in terms of customer traction and growth metrics. To get notified when I publish it, subscribe to our newsletter.