30 West 3rd

Very Early Stage Technology Investing

Why the first 3 customers don’t matter…

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Most of the software companies we encounter are able to produce a first product and close one or two customers on little or no paid-in capital.  This is a positive trend.  With venture investors looking for lower net burn rates and a clear path to sustainability, seed-stage investors are typically paying for the first 12-24 months of customer acquisition.

Unfortunately, the first one or two customers prove little about how the product is perceived and sold to the next 10.  First customers typically have some connection with the founders that will not exist as the company scales.  Early customers are buying into a vision or a relationship or even a curiosity.  They will have great influence on the first product, often driving features that will be irrelevant to the broader market.

Early customers also have little interest in competitors, bake-offs, RFI’s and RFP’s, much less internal purchasing controls.  First customers will cheat to get a product in and not expose it to normal scrutiny.  If they did, it likely wouldn’t make the cut.  First customers rarely agree to standard pricing and terms.  That’s not to say that you don’t get value from these first customers.  But they do little to prove how the business can scale at a pace venture investors desire.

Consequently seed investors must attract sales leadership to pre-venture companies, which is no easy task.  Proven sales leaders are in great demand, and those suited to an early-stage company role are rare.  They must have solid market knowledge, be willing to spend signficant time in the field, and be able to readily attract a team of similarly minded subordinates.

Attracting such a leader is a test for the early-stage CEO.  The right sales executive is probably more experienced than the CEO and will consume more total cash compensation than anyone else.  The sales leader should be ready to set targets and become increasingly accurate in hitting those numbers as the company matures.  Predictibility and consistent quarterly growth are required to attract venture investment.  The early-stage CEO must relinquish the leadership of the sales function to someone who can focus on it and be held accountable.

None of this is easy.  In all the companies with which I work, there are challenges in transitioning from pioneer customers to sustained and consistent top-line growth.  Flame-outs of sales VPs in early-stage companies are more common than successes.

Of course, flame-outs of early stage companies are also more common than successes.  Choose carefully.

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