LAUNCH CLOSE TO THE CUSTOMER
In every successful startup journey, there is a point of no return, where the aspiring founder moves from the idea stage to wholehearted commitment to the cause. This passage is always marked by a stepped-up investment of time and resources, and, in some cases, includes resigning from a job to plunge full-time into a new venture role. You are no longer contemplating whether to move forward. You are on the clock, with money falling through the hourglass.
Even after burning significant time and cash, however, many startups haven’t really started. They have yet to interact with paying customers. They understand very little about market demand. They may not have a ready-to-sell product or a workable channel for sales and distribution. Instead, they are engaged in pre-launch activities, such as conceiving the future business, developing products, building execution plans, recruiting partners, or putting supporting technology in place. These activities are typically necessary, and some types of ventures (life sciences ventures and speculative real estate development, for example) require long, heavily funded pre-launch periods. But pre-launch activities that are not directly aimed at acquiring clients are often several steps removed from the marketplace, the arena in which your venture’s viability will ultimately be tested.
Therefore, one of the keys to strengthening your runway is to move your effective starting point, the point at which you plunge in full-time and begin to burn significant resources, as close as possible to your point of revenue creation. This usually means incubating and gestating your idea as inexpensively as you can, while making a living through other means. How much of your idea can you develop and test in advance without a huge commitment of capital? How fully can you develop a working product before you make the full-time plunge?
How well can you research and understand the market for your idea, even pre-selling customers, before you cross the point of no return?
The opportunity here is two-fold. First, you will hit your runway with much more than a raw idea, bringing a keener grasp of your concept and projected path to profitability. Second, the more inexpensively you can answer the above questions, the more capital will be preserved for the critical process of iterating your idea in the real world, allowing you to get your offering in the hands of paying customers, understand their experience, and use this knowledge to improve your fledgling business model. With this approach, you can accelerate down the runway efficiently and with greater focus, instead of spending precious on-the-clock time bouncing untested ideas back and forth.
The most desirable point from which to launch a business is with paying customers already in hand, generating cash from day one. DriveSavers, a $20 million data recovery company based in Novato, California, was pulled into existence by a growing computer-based problem in the mid-1980s. Founders Scott Gaidano and Jay Hagan worked for a company that sold computer hard drives when the firm went bankrupt and closed. Out of work, they began talking about launching a seafood business, but they soon received frantic calls from former customers whose hard drives had crashed. At the time, few people knew how to recover data from fried computers. “There was no manual. Nobody knew how to do it,” Gaidano says. As they began helping customers retrieve data, word spread quickly, and a solid business was born.2
My first consulting practice was the result of client requests. While working with First Union Corporation in the mid-1990s, I was considering a move to external consulting but needed a bridge, something to help me transition from the security of a regular paycheck to the freedom and uncertainty of self-employment. Late in 1997, I received inquiries from two outside organizations needing consulting help. The resulting projects promised to bring a healthy revenue stream over four to six months, enough time to build a healthy pipeline of future business. These first clients gave me a solid bridge to the outside world and allowed me to set up my consulting practice with confidence.3
Although he didn’t start with specific clients in hand, J. C. Faulkner serves as an exemplary model for how to study and scrutinize a market idea while working for someone else. In his sales management role with First Union, he developed close relationships with hundreds of entrepreneurs and salespeople throughout the mortgage industry. Before resigning from his job, he knew exactly what customer segments he would target with his new venture and how his early business model would work. Even with this preparation, he spent more than $600,000 in capital over a year’s time before breaking even, but because he had patiently allowed his concept to mature prior to launch, he moved his effective starting point much closer to the marketplace than most venture founders.
In contrast, consider the example of two corporate professionals who, talking over a beer on a Friday afternoon, hit upon an idea for providing an innovative information service to large corporations. Within a few weeks, they had resigned their well-paying jobs. They tapped into their personal savings to bring two more salaried team members on board, leased office space for the team, built a prototype of their technology, and began pitching their concept to senior buyers in target organizations. After six months of expenses, as their resources began to diminish, they were still in search of their first account. These founders continue to gamely press on, and their concept may yet catch fire, but their margin for error is now razor thin. Had they chosen to test and refine their concept prior to committing full resources to it, it’s likely that they would now enjoy a much lengthier startup runway.