Don’t Generate Revenue Too Quickly
Chapter Eleven Excerpt: Startup Muse available from Amazon
The one thing almost all high growth startups have in common at their start is the fact that they don’t generate revenue. Ironically, investors often pressure startups to generate revenue as soon as possible — don’t do it. Recently I wrote a piece for Forbes explaining why early stage investors often claim your lack of revenue is the reason they’re not investing — don’t believe them. In my experience one of the WORST things an early stage startup can do is generate revenue too early. Most startups need time to build and refine their product or service. In most cases a startup’s Minimum Viable Product (MVP) is the sort of product or service you’d be comfortable letting a prospect beta test — it really shouldn’t be the sort of product of service you’d be comfortable selling. Startups should focus on achieving product/ market fit (PMF) before attempting to generate revenue. It is a LOT easier to get potential customers to use your product if it is free — the more customers you have the quicker you’ll reach PMF. If you focus on finding paying customers it will take you much longer to reach PMF. The sales and contract negotiation process is very time consuming and will delay your ability to improve your product or service. Most startups simply don’t have the manpower to build AND sell — you have to pick one and I recommend building.
The biggest disadvantage of early revenue is the fact that “potential revenue” is almost always more exciting than “real revenue”. If an investor is excited about the prospects of your product or service they’ll imagine a percentage of the addressable market they think you might be able to capture — invariably their imagination will be FAR better than reality. Selling in the real world is far more challenging than in the mind of a venture capitalists. The truth is that your early sales will be far less lucrative and far less common than your later sales. Smart startups skip early sales in favor of more information and better later sales.
Of course, this advice is all wrong if your goal is to bootstrap your startup. If you aren’t going to raise outside capital you should ALWAYS sell as soon as possible. Every dollar in revenue will allow you to build your startup without outside capital — it may take you twice as long to get your product right, but at the end of the day you’ll own 100% of your company. Remember, fewer than 1% of startups seeking capital ever raise a dime.