Posts Tagged: start-ups
It’s the age-old debate among start-up circles: which is more important to the success of a start-up: the strength of the sales/distribution strategy or the quality of the product?
On one end of the spectrum, many start-ups think that great products sell themselves, while the other camp argues that it’s the channel and monetization that define a company’s success.
The simple answer to the question is you need both. To be successful, a stand-alone company needs a top-notch product and a clever distribution/sales strategy. However, there are a few nuances to add to the discussion.
1) Start-ups are generally more successful when the founders are product-driven. It’s typically much easier to add sales expertise to a product-driven organization than it is to add product focus to a sales-driven start-up. Sales is more of an execution game, meaning a start-up can hire senior executives to shape and refine the sales and distribution strategy. On the other hand, a great product requires great leadership with the right product instincts. Those intangibles are usually much harder to add.
2) Sales-driven companies can turn into service organizations. Sales-driven companies are often focused on maximizing short-term return on investment and this mindset can shape product decisions. The natural consequence is that sales-driven companies can evolve into service companies as they are stating to build every feature that clients are asking for instead of following a long-term product vision.
3) The consumerization of IT is putting more emphasis on product. Historically, software and products were sold to a company’s purchasing agent and CTO. The sales cycle hinged on the ability of the vendor’s sales team to make the right contacts and manage the sales process and relationships from start to finish.
Today, it’s a different story. The CTO and other management no longer serve as gatekeepers for which products are used in the organization. Products are now introduced directly to end users. This trend has a double impact (and both in the product-driven start-up’s favor):
- Small start-ups that don’t have a large sales force can now sell their products in the enterprise.
- The enhanced role of the end user in buying decisions makes the product experience all the more important. Good products that are easy to use take hold in this environment.
While the sales cycle may be changing, start-ups still need to focus on their sales and distribution strategy. Products, no matter how great, usually don’t make money on their own. As a result, product-driven companies need to focus on distribution in order to succeed in the long-term.
One of the biggest questions facing any entrepreneur is how much capital to raise for their startup. It’s a delicate question…one that can have a significant impact on the fate of any startup. Raise too much and you’re diluting your ownership; raise too little and your company will have trouble gaining traction or making it to the next month.
While every investor tends to offer different advice on the topic, most will agree that there’s no magic number that applies to all startups and situations. There are multiple factors you need to consider, including what you’re trying to launch. A SaaS startup with immediate monetization options usually needs to raise way less capital than an advertising-driven business that can generally only monetize once it reaches a certain scale.
Yet while there’s no magic equation, here are three things to consider when trying to determine how much capital to raise:
1. Raise enough to sustain your company for at least 18 months
If you have the option to do so, raise enough capital for a minimum of 18 months. Fundraising takes an enormous amount of time and energy, from meeting with potential investors to honing your presentation. With a small round, you’ll end up thinking more about future funding than developing your product.
Many new founders think that because they’ve secured their seed round, it will be easy to find investors for the next round, and the next… However, a startup needs to demonstrate significant progress between funding rounds. By raising enough funds to give your business 18 months of runway, you can spend a whole year building your product and reaching milestones before it’s time to get back to fundraising.
2. Target between 15-25% dilution per round
I typically recommend that founders put more emphasis on the quality of investors (i.e. how can they help your business grow) and how quickly you can close a funding round (so you can get back to work), rather than focusing solely on dilution levels. However, you still want to target a reasonable amount of dilution as a goal and 15-25% per round is usually a good benchmark.
3. Keep funding to a minimum until you have found a product-market fit
Early rounds are particularly expensive, because company valuation is low. For this reason, you should try to raise as little as possible until you find a product-market fit. Once you can show traction, with scalable marketing and sales channels, you can get vastly superior valuations. Until then, try to keep your funding to the minimum of what you need.
Unless you’re able to bootstrap your startup until you reach profitability, you’ll need to raise money at some point in your company’s lifecycle. Deciding on the right amount of funding is a tricky question with no single right answer. However, keep in mind that the majority of failed startups end up closing their doors because they run out of money. Take the money, but do it wisely.
- Fundraising, Valuation and Accretive Milestones (startupnorth.ca)
Boris Mann and Danny Robinson (both Digital Media people to watch in 2008) have partnered to start an incubator in Vancouver (see Techvibes coverage here). I think that this is incredible news for our city – as I said before, Vancouver has already a lot of engineering and entrepreunerial talent as well as VC money but we need more experienced entrepreneurs like Danny and Boris to help grow ideas into real companies. This is an important step to turn Vancouver into a really buzzing start-up city, good luck to both of you, look forward to seeing many successful products and companies coming out of BootUpLabs!