The first thing I always think about whenever I hear a start-up idea is how to reach the customers.
The best start-ups can reach customers via:
Search (Adwords and SEO),
Social (Twitter, Facebook, LinkedIN etc) or
Communities (Blogs, Meet-Ups, Conferences, Industry Groups, Partners, etc)
If your start-up can’t take advantage of any of these channels, eg. there’s not a lot of search traffic, or your product doesn’t appeal to a particularly community, then acquiring customers is expensive.
Direct sales can be an option, particularly for enterprise products, but cost of acquisition can be very high – good salespeople aren’t cheap!
The best way to demonstrate reachable customers is via search traffic.
If the keyword tool indicates there’s a tonne of people searching for keywords relevant to your product you could have a real business.
For example, Mint.com used heavily trafficked (search) terms like “personal finance software” to generate trials. They also targeted personal finance bloggers (community) and had a very high peer-recommendation and referral rate (social).
Investors want to know the economics of one customer. For example, how does one user result in revenue for your start-up?
Or if it’s a freemium product, what percentage of users convert to paid?
SaaS investors will want to know what percentage will leave your service every month. Also, how long do you expect the average customer to stick with your service?
If you’re building a marketplace, investors will want to know what the average transaction is (or likely to be), what percentage you take, what are the average transaction costs (transaction fees, maybe shipping) and how many transactions each customer is likely per annum.
Whatever the business model is, you need to be able to explain what your revenue drivers are to investors and describe how at even a small scale the product makes money.
Investors love teams that are building a product where they have real-world experience.
For example, SmartOrders.com.au, a start-up I work with, is building a stock-ordering and stock-take application for café’ owners. The founder also owns two cafés and so instantly knows all the problems associated with the supply chain, ordering and stocktaking process.
This domain expertise is invaluable.
If your start-up is pointed at an industry you don’t know enough about, throw yourself in the deep end and take volunteer or part-time work to wrap your head around the issues people face within that industry.
Otherwise, you will be guessing, and making inroads into the market will be hard work.
Your ability to get customers, form partnerships, get PR, attract staff and attract investors ALL depends on your ability to make friends and influence people.
Too many start-up founders try to sell, sell, sell – desperately spruiking their idea to anyone who’ll stand still long enough.
This approach is really off-putting and results in the opposite of what you’re trying to achieve – making valuable connections that can help you grow the business.
There’s no secret, people will go out of their way help people they like and avoid people they don’t like. Be the person they like. Make friends.
This point quickly follows the last, but the importance of humility can’t be over stated.
The single most off-putting thing for an investor is a cocky entrepreneur who knows everything; has all the answers and won’t take feedback or advice on board.
An investor can’t afford to back someone like that; because basically it makes life difficult.
So, as a start-up founder, make friends and avoid being a know it all.
Even if you are an absolute rock-star, which you could well be, be humble enough to take advice and listen to people trying to help.
Building a company is hard work; and yes you’ve put blood, sweat and tears into it, but don’t make the mistake of thinking this entitles you to sell a small percentage of the company for $1 million.
Unless you’re doing (very) good revenue numbers and want to bootstrap the company long-term (which isn’t a bad thing!) don’t expect huge valuations at round one.
If you have a direct inroad to the US market via an accelerator like 500 Startups or TechStars you may get higher valuations; but if you intend to base your start-up here be prepared to be more flexible.
While you may get a higher valuation from unsophisticated investors; remember that start-ups make their money on their exit not on their seed round.
Many start-ups get offered an investment, then hold-off waiting for a better offer. The problem with this approach is, the opportunity cost is massive.
You risk missing your window of opportunity to build a big company while you wait for a seed round. Remember, timing is everything.
This piece of advice probably trumps all else. Investors want to see that real customers, with real money are using your product.
Often a start-up ticks all the boxes described above, but doesn’t have enough traction to get the investor excited.
You don’t necessarily need 1,000 customers, and quite often 30 to 50 will be enough for a B2B service but the more time you can spend on building up your customer base, testimonials and press, the better.
Don’t be disheartened when investors say they want to see more traction, just keep plugging away and building momentum.
If you can’t get traction, then revisit your project. Interview potential customers and consider ditching the project altogether.
There’s no shame in shutting down a start-up and shifting focus to a bigger opportunity in a better market.
There’s no shortage of ideas, but there’s a real shortages of right teams, with the right product at the right time.
Andrew Birt is an entrepreneur and co-founder of Melbourne based start-up accelerator Angel Cube.
