As a career entrepreneur, I wear the customer-first badge. Proudly. I strongly believe raising money through customer sales is the best option, and in a lot of cases, it should be the only option.
I don’t want to have to ignore a great startup idea because west coast venture capitalists won’t deem it investable. I also believe that the vast majority of startup ideas aren’t VC-investable in the first place, at least not initially. They could be massive successes — they just shouldn’t try to buy that success with VC money out of the gate.
Now, that’s not to say I don’t believe in the VC model. Far from it. I’ve been down the VC-funded road half-a-dozen times now, and to be honest with you, it’s been a totally different ride each time. And it’s actually gotten easier each time.
For example, Automated Insights could not have done what we did — maximizing Natural Language Generation to write stories which humans could or would not write— without a capital infusion. But we were careful to raise and deploy that capital the right way.
We were also very lucky, because while it’s certainly no longer impossible for an early-stage startup to raise VC in North Carolina, it’s still highly improbable. And even when it happens, it usually happens to startups that already have customers, revenue, and solid management in place — all of those things that make VC less necessary.
No. This is not the Valley, where you can go unicorn on a dream, if you’re into that sort of thing. So I am, by both necessity and choice, customer-first.
And you should be too.
But as it is with a lot of entrepreneurial advice and punditry, everyone says you should go customer-first but no one actually tells you how to go customer-first.
So here are the three ways I did it. These aren’t the only ways, these are just the ones that worked for me, and I’m not going to advise you to do something I haven’t already done.
Turn a service into a product
This is the most direct route to revenue. Start with a service that’s both valuable and profitable, get better and better at it, and all the while make parts of the process repeatable and reusable. It doesn’t matter if your service is coding, designing, or plumbing. Whatever. Evolve your approach until your service becomes quicker, more cost efficient, and can be performed by someone other than just you. These people will become your employees.
The very first startup I joined was a consulting firm that built custom solutions on a dedicated software package. In today’s world, this would be a Ruby shop or a web design firm.
The consulting firm’s differentiator was a number of internal custom frameworks that we built and used to speed and bulletproof our development cycle. Eventually, we were doing 80% of the work with these frameworks and 20% true custom build. We got the same job done in half the time, and it was much higher quality, with less testing.
So we decided to start concentrating on selling the frameworks and letting other consulting firms do the customization. Our margins spiked, we eliminated almost all of the headaches that go hand-in-hand with custom service work, and we grew like crazy.
Like I said, the root of the service startup doesn’t have to be coding or even technology, it can be anything you charge an hourly rate for. But it’s almost inevitable that technology will be the source of the framework you build your product on. Technology allows for automation and repeatability, ultimately creating recurring revenue without additional labor costs.
Product startups that emerge from service startups are the easiest to start and fund, provided you have the service part already underway and successful. The problem is that, like most things that are easy to start, it’s a lot of work to grow and sustain. It’s difficult to escape the gravity of service startup economics — high labor costs, tons of administrative and management layers, low growth prospects, and valuations at about 1x or 2x annual revenue.
But if you can morph your service into a product, you can get acquired at a pretty good return. And you can make a good living while you do it.
Spin your company out of your job
The most common route to startup, believe it or not, is to innovate your way out of your day job. The majority of new entrepreneurs are spawned from the ranks of corporate behemoths, where they’ve been doing the same thing long enough to see all the flaws, so they find the areas most ripe for disruption and then attack those areas with new ideas.
My story here is a little off the beaten path. I’ve been doing startup my whole career, and I’ve been doing it in a place, as I mentioned, that really had no startup ecosystem until recently. I’d been a part of the ecosystem we did have and had spent a lot of time trying to make it into something more helpful, more open, and more useful. I constantly found myself saying, “You know what this place needs?” One day I just got off my butt and started answering the question.
I accidentally built a media and data startup around those answers and sold it three years later to an incubator. I don’t know. It’s what I do. Everything is a startup to me.
Every company large and small has their share of those folks looking around their vast cubicle mazes and asking that question — “You know what this place needs?” The best among them start suggesting answers and, provided the company is open to change, are rewarded for their forward thinking. Failing that intra-company support, or maybe just because entrepreneurism can’t be contained, they’ll opt to start their own company to go head-to-head against their old company.
These new companies rarely need funding because customers are close by. I’m not encouraging anyone to take clients from their former place of employment, but this happens a lot. Just as often though, the new company will create new, more loyal and more profitable customers from the prospects at the old company who never became its customers because of the flaws at the old company that this new company is in a position to fix.
This is not an easy path though. It’s hard. It’s dangerous. And even if you can tear out a new company from an existing company, the old company will still be the big player and still have muscle to flex.
But if you can survive those initial battles and break out and stand out, the odds of success are pretty high.
Start from scratch and reinvest
The hardest route to customer-first startup is the most fun and also the most likely to fail. It’s making something out of an idea and getting people to pay for it.
It’s the hardest route because if the idea is worthy of building a company around, it’s something that has probably never been done before. There’s no roadmap, no market screaming for your product, no adviser or mentor who can come in and tell you how to get started. You’re not only making the product, but you’re making the market, the sales channel and most of the rules.
It sounds great on paper. It’s freaking scary in real life.
My very first solo startup began life as a way for me and my writer friends to save stuff we wrote for other publications because back in the day large media companies like newspapers and magazines would pay us to write articles exclusively for their websites and then remove those articles from those websites a few weeks or months later.
Yeah, that’s how things worked back then. Apparently, in the early days, storage space was expensive.
Those writers would pay me to host those articles after their public shelf life expired, then I came up with some basic rating and commenting tools, then some more advanced rating and commenting tools. Then those writers started writing articles just for my site. Then my site became kind of what Medium is today, but this was back in 1999.
I kept changing the tools, the pricing, the revenue streams, the model, even the focus. Soon I was honing in on thousands of dollars in profit per month, which was way more than I ever made writing tech articles.
Building a successful product from scratch requires a very disciplined trial and error — changing and testing everything from small feature tweaks to the entire core of what you’re creating. Your product could, to paraphrase an old Saturday Night Live skit, be a floor wax one day and a dessert topping the next.
Then you measure how much of an impact each of those changes made to the bottom line — how many people are willing to pay how much for it, and if they’ll keep coming back every day.
Here’s the catch. Unless you’re independently wealthy or very, very careful, it’s hard to fund these trial and error cycles for very long. A lot of these entrepreneurs work on their ideas on the off-hours of their day job until sales spike or they fall into that first big customer contract.
My own company ran revenue positive for 12 years, but never broke through a ceiling that kept it in that quadrant of nice-to-keep-alive but this-isn’t-gonna-make-me-rich.
While building from scratch is the hardest and riskiest way to go customer-first, it’s definitely the most rewarding. You wind up with a company with VC-level growth prospects and, if you play your cards right, almost 100% ownership. No dilution.
Here’s the kicker. Any of these three customer-first methods can result in companies that could take VC or other public money later on, once they’ve established their product, revenue, and sustainability. The great thing that happens in these cases is that the entrepreneur winds up negotiating from a position of strength, and even better, he or she will know exactly how to put those funds to work to get the massive return that everyone is expecting.