Shall founders focus on sales in the early stages of their startup? Being part of the venture capital industry, I am really excited to work with founders every day. There is nothing more thrilling to me than to start something new and help to make it grow. Bringing new products and business models to the market remains essential for every economy. Startups are therefore the fresh blood for the world’s economic system. In this article, we are going to talk about the best way to build your startup. Let’s dive right in
“Nothing happens until a sale is made” – Thomas Watson Sr. (former President IBM)
Finding the right approach to successfully sell these products and services to the customers is a key challenge for founders. Your sales approach should be addressed very early in your startup´s life.
Fundraising will remain challenging and why you should consider focusing on sales early on
There are a lot of challenges and hardships while learning how to build a startup from scratch. Despite the constant increase of funding in the European venture capital ecosystem, it’s still not easy for many founders to acquire the funds needed to get their businesses going or to scale it appropriately. A lot has been written about the challenges and deficits of the European approach to venture capital. For the sake of this article, I want to focus on four aspects around an early focus on sales. I think this could be one way to lower the burden of fundraising and help to build a sustainable company.
Hase the risk appetite of VCs changed?
As pointed out in this analysis from Cambridge Associates the risk-return profile of VC has narrowed to that of the PE sector over the last 20 years. Loss Ratios came down tremendously from >50% between 1991 and 2001 to 20% in the years from 2002 to 2015.
The steps to create a successful startup seems to be driven by two factors. Firstly, there is a better risk management approach. Venture capital funds are spreading their risk over 20 to 30 investments per fund. Secondly, the time frame and amount of money needed to validate a product or business model. Time to market is much shorter nowadays. This allows fund managers to focus on the winners in their portfolio early and cut back on the fails. As the report shows the returns in venture capital are mainly driven by new fund managers entering the industry. They are heavily focusing on constructing robust portfolios following a rigorous risk management approach by limiting their exposure to not yet scaling businesses.
This might sound like a good thing for venture capital investors and those who are looking for the best way to build a startup. On the other hand, it puts a lot of pressure on founders to prove the validity of their product and business ideas fast. Following that argument, an early focus on sales will give you the strongest argument one can have and will help to dispel the investors’ concerns. Customers that are willing to pay and successfully close deals are the most powerful arguments for attracting investors. Building up a proven and efficient sales organization will help you to qualify for follow-on financing as well as attracting growth-stage focused investment funds.
Lack of growth investments in Europe
As correctly pointed out in numerous articles there still is a lack of larger growth funds writing cheques of 10 million euros and more. German scale-ups acquire money mainly from abroad. This might turn out be a big problem for the German and European economy in the long-run.
This is certainly true and indisputably a deficit of the European venture capital industry. There are a lot of arguments why this limits the ability to scale the business and create global champions. A number of (governmental) initiatives have been started to overcome this problem. I really hope that they will be successful. For the time being, founders are well-advised to accept the fact. It might therefore be a reasonable approach to focus on revenues as a source of funding very early. The point I want to make here is that there is nothing more valuable than being the architect of your own fortune. Learning how to build a startup in 2020 Building up revenues early gives you a lot room to maneuver. It is a solid base to build on, even it means slower growth in the beginning.
How will (Corporate) Venture Capital react to tightening economic conditions?
It remains to be seen how the venture capital industry in general and especially the corporate venture capital funds will react to a (potentially) upcoming recession. Fund managers may well be more risk averse. Consequently, they will focus on keeping alive existing portfolio companies. Corporate venturing might be among the first victims of saving programs. Focusing on sales early on might help your startup to gain runway and survive a recession until funding conditions ease again. Depending on your product or services sales could be a lot tougher in recessionary times. On the other hand, bringing a superior product to market which helps customers to become more cost-efficient might work even better those days.
The hard truth about the value you are creating
Have you have ever tried to pitch a new (and may be even a not yet existing) product to a potential customer or an investor? Everyone who did will agree that is a fantastic exercise to learn about your idea and the way you present it. The idea of focusing on sales early in your startup’s life might appear to be risky. You present a very early version of your product to potential future clients. For sure the correct timing for doing so remains a judgement call. Doing it early will save you a lot of money and will actually prevent you from building something of low value. The feedback and the questions of your target audience might guide you on the way to deliver successfully on your vision. For sure it can be hard to hear the truth but it could be a helpful shock.
Revenue ist the best protection from dilution
It sounds trivial, but I still feel that a lot of founders have not thought about it thoroughly. Clearly, you can go and raise funds from VCs discussing and negotiating terms every 12 months or in even shorter cycles. But even at the current valuations, you will need to give away 15% to 20% in every financing round. Consequently, your company valuation for an exit needs to grow accordingly to leave the founders with life-changing exit proceeds.
Let’s look at a small example. This would help you find the best way to build your startup. The diagram below illustrates the needed company valuation at the exit to generate a life-changing 15 million EUR return for the founder(s):
Above all, founders (and investors) need to realistically assess whether the additional funding can bring up the company valuation to make up for the dilution. Let’s be realistic here, in many cases there will be no alternative to fundraising as you run out of cash. But focusing on sales early can be a good way to limit the need for additional funding. In addition, its also a good way to assess whether you could lever up your valuation with that additional money. As an entrepreneur it should be your focus to limit external funding to the absolute minimum. Therefore, you should only give away shares if its unavoidable to bring your business to the next level. Success should be defined as raising only the money you really need. Landing the biggest funding rounds at the highest valuation is not as important.
Sure, the points above do not apply in each and every case. Especially tech-savvy companies require a lot of research and development work in order to bring a first prototype of their product to the market (e.g. Volocopter, Lilium, Tesla etc.). An early focus on sales might not work here.
seed + speed Ventures: The Sales VC
Building up an efficient and successful sales organization is a startup within a startup and there is a number of common mistakes you can make. Having a good product is obviously not enough. You should focus on building up your sales organization early to create a solid ground for a scalable business.
Especially in the early stage phases founders are well-advised to carefully choose their investors. They always should evaluate their ability to deliver additional value that goes beyond the money. At seed + speed Ventures we are making a difference by bringing a tangible value to add to the table: Sales expertise!
We hope that this guide was compelling enough for you to invest in finding the best way to build your startup. We are there if you need any further assistance.
With a dedicated team of experienced sales-experts, we provide to our portfolio companies anything needed to build up a performing sales organization. May it be a thorough analysis of your clients’ needs, implementing your CRM, creating your sales bible, or bringing sales processes to life. We do what is needed to help you to grow your company.