Should I try to get a customer before an investor?

July 31, 2009 at 1:01 am Leave a comment

If focusing on the first sale first is so powerful, should every startup do it? The answer is no. There are types of businesses that cannot use this approach. In addition to the type of business, focusing on your first customer is most effective at certain stages of your development – and its earlier than you think!

The first characteristic to consider is your typical deal size. If the amount of money you can get from one or even a few customers is insignificant compared to your capital needs early on, you probably cannot use this approach. For example if you have a service you plan to sell over the web at a $20/year subscription price and you need $200,000 to get the service up and running, raising money from early customers (customer capital) is probably not going to work for you.

The second question to consider is regulatory requirements for your product. If you are developing a new drug and require FDA approval, it is going to take a long time and a lot of money before you are legally allowed to sell your product to customers. This makes it very hard to fund pharmaceutical startups with customer capital, although it’s been done. Someday I hope to be able to tell the story of how one pharmaceutical company I know did it.

The third question to consider is stage. At what stage of development of your startup should you focus on trying to get a customer to buy your product for cash? My answer is at the very beginning. I’ve seen serial entrepreneurs and first-timers sitting in coffee shops having highly animated discussions — it’s not just the caffeine. The difference? The first-time guys are sitting with their buddies and dreaming big. The serial entrepreneurs are sitting with their customers and figuring out what they will buy and for how much, before they even start building it.

When you are trying to figure out:

  • if your technology works,
  • whether you have identified the correct market segment, and
  • is your value proposition is compelling,

that’s the time you need direct and honest feedback from customers. I know of no better way to get that candid feedback than to ask your potential customer for cash. If you succeed in convincing the customer – great – you have cash to continue development. If you don’t, you learned something that would have taken months to ferret out.

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Entry filed under: new venture, raising capital, startup.

Why focus on your first sale first? Who do you know? Networks Essential to Entrepreneurial Success.

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