This is the last article in our series „10 strategic building blocks for your startup“.
While the previous nine were intended to equip your startup with the credibility required to become a force to be reckoned with, in reality this is the most important building block. Attracting customers that genuinely want your products and services and are willing to pay for it is the only long-term way of becoming a sustainable company, and thus, leaving the startup circus.
The Startup Circus
Products from startups can be compared to circus animals. They attract a huge crowd and they can perform some cool stuff on stage. They provide a lot of excitement and entertainment in the process, but, if left to fend for themselves in the wild, would quickly die.
By the time they’ve practised their stunts and are ready for prime time, they are often limited by investor interests, founder quarrels, lack of team motivation, overengineered but incomplete product and many other expectations that turned into disappointments.
These product or company limitations however don’t appear over night. They grow over time and are fed by the whole team’s emotional weaknesses, especially those of the founder’s and the CEO’s.
Too philosophical? Maybe. But in my own journey through several startup companies as founder, investor and advisor, I’ve come to learn the hard way that these weaknesses creep in, and if you want to move from startup to company stage, you have to be aware of why.
Almost every bad decision (in retrospective) has had a negative mood underlying and influencing that decision. So the team’s ability to take tough decisions when needed and act without fear or uncertainty are key when taking the gloves off and moving from startup or growth stage to paying clients and company stage.
Clients vs. Paying Clients
The only way to break free from this vicious cycle is to have your own crowd, who attend and pay for your performance. This is different from being well funded and it’s even different from making a successful exit. It’s similar to being a parent as your child leaves home, finds a job and starts taking care of themselves.
Funny enough, there is a lot of contradictory advice out there, especially when you talk to VC investors. Most will encourage you to focus on user growth first, rather than „ringing the freaking cash register“. But forgetting the importance of cash flow is a serial killer of startups. Simply by getting a few paying clients, you might be able to avoid those critical cashstrapped days that have taken down bigger, better startups than yours. Betting on user growth alone and ignoring the cash register works in such rare circumstances, that you may well play lotto instead.
So what about „Freemium“ you might ask?
The rise and fall of freemium models have been well documented in many articles and blog posts. Phil Libin, the founder of Evernote, originally planned that only 1% of users would eventually convert into paying users. That means out of 100,000 users, on average, only 1,000 pay.
The crucial question for your startup is – can you afford the other 99,000 users ? If you’ve got $100m in the bank maybe. But what if you don’t?
Users vs. Clients or: Getting rid of the bad habit of „free“
Unfortunately, Google has done a splendid job with creating free services and they’ve been very clever about it, making them a „quasi“ commodity across the web. The biggest attraction for users to switch to Gmail for instance was the seemingly unlimited mailspace, even at times when Gmail’s functionality was severely limited compared to other webmail services and email programs. While that strategy really worked for them, even Google will have to pay a price for it eventually.
But it’s not only Google who has truly spoilt an entire generation by giving stuff away away for free. Many organisations grew to the top that way (be it Google, Microsoft, Facebook and others), but when looking at those strategies from a longer term point of view (a couple of decades instead of a couples of year), things aren’t so clear any more. People slowly but surely realize that there is always a price to be paid for a service, whether it’s in the form limited functionality or support, reduced freedom or privacy rights and the uncertainty for whether the service will still exist in a years time (see Google Reader).
My advice is, don’t go for a free, or a freemium model and don’t amass users for the sake of it. Get cash in the bank, and as little as it may be, but get it from paying customers.
Charging for early access and trial periods
Giving early users special access or making them part of an early alpha program is good business, but having people pay for a priviliged beta access, is better business.
In essence it’s how crowdfunding sites, such as Kickstarter and Indiegogo work. So consider plans where people pay for a lifetime membership and start getting actual, real customers invested rather than training them into thinking there is something free, but it’s not so clear for how long. With the other startup building blocks in place, one need not fear charging customers early on!
The business model matters
When focusing on paying clients to finance your company’s destiny, the business model matters. If you’ve partnered with corporates you may greatly widen your access to markets and customers, while having less pain with billing and payment collection in local currencies and transactions.
As a consumer facing product, you must have great natural virality built into the service you’re offering, otherwise the marketing costs will be enormously high and often aren’t feasible in the long run. It’s a constant make or break situation and in this situation, growth can all too easily be equalled with success, which it simply isn’t.
Recurring revenue is a beloved business model these days, especially in SaaS (Software as a Service) and something that most investors like a lot. However, I’d recommend to do some research on whether that’s truly the best option for charging your clients when going to market. Taking (even if small) a one-off fee for a smaller part of your product or service which doesn’t require much support or maintenance from your side, can train a customer to pay, Such customers can later more easily be converted into a subscription based model but they’re trained from the beginning to pay for value delivered.
Unfortunately, it’s also not always clear, what product you should start charging for in your bid to find your first paying clients. To give an example from Unified Inbox: we plan to start charging as soon as our unification engine is complete. However, through market research it became clear that the feeling of most potential customers is that email, social media and inbox related apps are free and a comodity these days. The unification alone doesn’t seem to be much value for them as they simply can’t experience those services that we’ll be able to deliver on top of a Unified Inbox (such as central spam management, unified search, backup, conversations and analytics for any type of communication) – which take time to build.
However, without realizing the convenience this brings and the productivity gains that come with it, it’s impossible to imagine the impact a Unified Inbox can have on work-life balance, in solving information overload and re-gaining the ability to focus on things that matter. While we and our loyal early testers may know this and based on our experience of using the product for a couple of years now could put a personal $ value on it, most people simply won’t. So what to do?
We realized that making a product that users use versus having one that users actually buy, simply isn’t the same thing. As it turns out, they may be two different products! So instead of selling a fully fledged Unified Inbox service or app, we’ll be offering various smaller apps and services (stay tuned!) that will eventually lead into the big vision which we’ve had from the very beginning, but by guiding our users step by step along the way, we’ll be able to create a business model curve which provides maximum value for our customers and other key stakeholders (investors, partners and of course our absolutely awesome team) along the way.
My advice is: choose the product you want to get your first paying clients with wisely (biggest pain solved with the least effort creates the biggest margin in the beginning!), and know that the product which attracts users may not be the same as the product they pay money for – at least in the beginning.
How to find clients
There are many ways to go to market and to find clients, through advertising, PR, networking effects, building a sales force and so on. A lot depends on your product and the pathway to market you’re taking, so there is no one size fits all approach.
If you’ve been following this series until now and are implementing some of this startup building blocks strategically into your company, I recommend to make use of them to find potential clients by reaching out to the followers on your founders blog (do you have one?), the university (and its students) you may have partnered with, the government (and its departments) that supported you, the investors (and their friends) who invested in you, the advisors (and their network) that mentor you, your corporate partners (and their F500 clients) and of course the entire team’s friends and family members.