Monday, October 30, 2006

Lesson #8 - Money comes First

This may be the most important lesson of all - Money comes First. I think a sign should be hanging above the garage door for every entrepreneur to look at when they come into work and when they leave to go home. For some reason, Money has taken a back seat in most of the business plans that come across my desk. Don't get me wrong - I am a sucker for a "cool idea" or a "disruptive technology" - but I think that innovation (or call it intellectual property) is a far second to what matters most - having people pull out their wallet and pay to play. Much like a hitchiker needs to start walking down the road with their thumb out - heading the direction they want to go until they get a ride - it is critical to be out in the market and communicating with customers. So many entrepreneurs are wearing blinders, never asking the market what they really want.

So what is "not so obvious" about this lesson. Let me start with the more radical ideas I have, and then dive into my more basic principals. First, I think companies should strive to show revenue on Day One of the business. No more statements like "we should have our first customer in month 12" or "First revenue should hit, once we hit 10,000 users and we begin to monetize traffic". These are statements only a few people can make and be taken seriously in my book. I want to hear the entrepreneur say "Our goal is drive our primary revenue from X, but right now we believe we can sell Y until we are ready". To summarize - find a way to make money NOW! If you are a software company building a new product - try to find a customer willing to pay you to develop the product for them - or better yet - find a company with a similar product and resell their product until you are ready to sell yours. If you are a web-based business - think of creative ways to monetize users - and not depend on long-term traffic to drive revenue. By thinking "Money comes first" it will not only get you customers and pay the rent - but it will fine tune your business plan and ultimately may open your eyes to a a better idea.

Here are some other reasons why you need to change your business plan to focus on money first.

1.) Investors - if you want to raise money - the single most important thing an investor looks for is a proven business model. Which means you sold a service or product and someone paid for it. It is that simple. Investors who say "management team is number one" are either full of shit or are investing in people who sold their businesses to Google or Microsoft and are launching a new venture. When you are an above average entrepreneur - you need to focus on revenue.

2.) Customers - there is nothing more obvious - but I need to state the obvious - customers are the best way to turn your business "idea" into reality. Not because they give you money - but because they tell you what they want, and the allow you to focus on what is important, and forget the rest. It is shocking to me how many entrepreneurs launch a product or service without doing basic market research, like sending out a survey, or even talking to customers about the product. Research and Development should start with the customer, not end with the customer.

3.) Employees - we all know that the driving force in a startup are the few people that show up (usually underpaid or not paid at all) and rally around the vision of the company. For the first 12 months of any new venture - it lives and dies on the momentum and excitement that spawns from the employees. In my opinion, there is nothing more exciting then landing a customer. It is the fuel that will give employees the energy to work that much harder, and gives them a sense of security in what they are building.

4.) Entrepreneur - Lets be honest - every entrepreneur (no matter how much they believe in their idea) has some level of doubt. There is always one "IF" statement when describing a great idea. For the sake of sanity, and more importantly for the sake of not wasting 2 years of your life - make sure there is a market for your vision, and go get a customer to confirm your beliefs. It is hard enough being an entrepreneur - let alone a mind reader. Pick up the phone, call a customer and ask the questions. Don't be afraid of the answer.

1 comment:

Jeffrey said...

I co-founded a mobile software company in 1999 on a little bit of funds from someone who trusted me. We built a nice little business on deals we closed in the first and second years. Sure, we were building product, but we let customers help us build it. Don't get me wrong, we also needed some funds to make payroll but there are so many reasons to start selling from DAY ONE that I'd waste oxygen explaining it to someone who didn't understand.

I remember watching one of our largest competitors go belly up in early 2002. They had over $15 million invested in two rounds compared to our $1.5 million from friends and family. I decided to learn something so I called the CEO at home to chat. He answered -- big surprise.

We had a great chat and learned a lot from each other. They had fewer customers, less revenue, even less product, and no focus. But they had a great logo and website!

Some business models don't lend themselves to revenue on DAY ONE. But many so-called entrepreneurs take the money and run. Not all of them are created equal. After all, it's a hell of lot easier to sit around building product, marketing plans, websites, and going to company parties, isn't it?