I wear the customer-first badge. Proudly. I strongly believe raising money through customer sales is the best option, and in a lot of cases the only option.
In other words, I don’t want to have to ignore a great startup idea because it isn’t investable. I also believe that the vast majority of startup ideas aren’t investable, at least not initially. They could be massive successes—they just shouldn’t do it with VC money out of the gate.
That’s not to say I don’t believe in the VC model, far from it. I’ve been down that road half-a-dozen times now, and to be honest with you, it’s been a totally different ride each time. And it’s actually gotten better each time.
The most recent ride was (and is) with Automated Insights. We could not have done what we did and what we’re doing without a capital infusion. But we were careful to do it the right way.
We were also very lucky, because while it’s certainly clear that it’s no longer impossible for an early-stage startup to raise VC in North Carolina, it is still highly improbable. And even when it happens, it usually happens when there are already customers, revenue and solid management in place—all of those things that make VC less necessary.
This is not the Valley, where you can go unicorn on a dream, if you’re into that sort of thing.
So I’m customer-first, and you should be too. But as it is with a lot of entrepreneurial advice and punditry, everyone says customer first but no one actually tells you how to go customer first.
Thus, to right that wrong, here are the three ways I did it. These aren’t the only ways, these are just the ones that worked for me, and I’m not going to advise you to do something I haven’t already done.
The most direct route is to spin a product out of a service startup. The very first startup I joined was a consulting firm that built custom solutions on a dedicated software package. In today’s world, this would be a Ruby shop or a web design firm.
The consulting firm’s differentiator was a number of internal custom frameworks in the software that we used to speed and bulletproof our development cycle. Eventually, we were doing 80% of the work with these frameworks and 20% true custom build.
So we decided to start selling the frameworks and let other consulting firms do the customization. Our margins spiked, we eliminated almost all of the headaches that go hand-in-hand with custom work, and we grew like crazy.
The root of the service startup doesn’t have to be coding or even technology, although it’s almost inevitable that technology will be the source of the framework. It allows for automation and repeatability, ultimately creating recurring revenue without additional labor costs.
But you can apply those technical advancements to recruiting, accounting, even dry cleaning. Whatever.
Product startups that emerge from service startups are the easiest to start and fund provided you have the service part already underway and successful. The problem is that, like most things that are easy to start, it’s a lot of work to grow and sustain. It’s difficult to leave the gravity of service startup economics—high labor costs, tons of administrative and management layers, low growth prospects and valuations at about 1x or 2x annual revenue.
But you can definitely make a living. You can even get acquired at a pretty good return on investment.
The most common route is to innovate within your current vocation. A number of entrepreneurs are spawned from the ranks of corporate behemoths, where they’ve been doing the same thing long enough to see the flaws, so they find the areas most ripe for disruption and then attack those areas with new ideas.
ExitEvent kind of fit this mold for me, although I wasn’t expecting to start a company around it. But the impetus follows the formula. I’d been doing startup in the Triangle for over a decade and I found myself constantly saying, “You know what this place needs?” One day I just got off my butt and started answering the question.
A stronger network? Check. A directory of who is who so it’s not like reinventing the wheel every 12 months? Check. A media site dedicated to startup? Check. A community for entrepreneurs by entrepreneurs? Check.
Every company has their share of those folks looking around their vast cubicle mazes and asking that question, “You know what this place needs?” The best among them start suggesting answers and, provided the company is open to change, are rewarded for their forward thinking. Failing that, or just because entrepreneurism can’t be contained, they start a new company to go head-to-head against the old company.
These new companies rarely need funding because customers are close by. I’m not encouraging anyone to take clients from their former place of employment, but this happens a lot. Just as often though, the new company will create new, more loyal and more profitable customers from the prospects at the old company who never became its customers because of the flaws at the old company that this new company is in a position to fix.
This is not easy though. It’s hard. It’s dangerous. And even if you can tear out a new company from an existing company, it'll still be the big player and still have muscle to flex. But if you can break out and stand out, the odds of success are pretty high.
The hardest route is the most fun, and that’s solving a problem by evolving an idea. It’s the hardest route because, if the idea is worthy of building a company around, it’s something that’s never been done before. There’s no roadmap, no market screaming for your product, no adviser or mentor who can come in and tell you how to get started. You’re not only making the product, but you’re making the market, the sales channel and most of the rules.
It sounds great on paper. It’s freaking scary in real life.
The best way to do this is trial and error—changing and testing everything from small feature tweaks to the entire core of what you’re creating. Your product could, to paraphrase an old Saturday Night Live skit, be a floor wax one day and a dessert topping the next. It all depends on how many people are willing to pay how much for it.
And if they’ll keep coming back every month.
Here’s the catch. Unless you’re independently wealthy or very, very careful, it’s hard to fund these trial and error cycles for very long. A lot of these entrepreneurs work on their ideas on the off-hours of their day job until sales spike or they fall into that first big customer contract.
While this last method is the hardest, it’s definitely the most rewarding. You wind up with a company with VC-level growth prospects and, if you play your cards right, almost 100% ownership. No dilution.
Here’s the kicker. Any of these methods can result in companies that could take VC or other public money later on, once they’ve established their product. The great thing that happens in these cases is that the entrepreneur winds up negotiating from a position of strength, and even better, he or she will know exactly how to put those funds to work to get the return that everyone is expecting.