Catapulting startups into scale mode or the answer to the question — “Do you have revenues?”

Everybody loves revenues! But not all revenues are created equal otherwise every startup would just sell the summer equivalent of lemonade or the latest human addiction… like colouring books!

Founders create startups in response to a large unmet need in the market that is not satisfied by current enterprises in the market. The first step in the startup’s journey, customer discovery, is all about doing things that don’t scale - the focus here is to be able to deliver repeatable customer delight (listen to Reid Hoffman’s interview of Airbnb founder Brian here)- nothing is optimal. For the impact crowd, this is the phase referred to in the Acumen — Monitor (now FSG) “Blue-print to Scale” report as the validation phase. Any sales generated in this phase are just part of the customer discovery dialogue and should be discounted. Towards the end of this phase the startup looks for business models that ensures that it can profitably deliver its services to its customers while maintaining the value proposition (customer delight). As it explores different business models - till it arrives on the repeatable business model that it believes has the highest potential for scale, the sales still cannot be counted towards what can be scaled. So, iterate for customer delight, then iterate for profitability and then iterate for scalability. In that sequence — it gets easier as you move from human centric problems to engineering problems to business centric problems. Once the business model of choice is picked it is time to prepare for scale — time to build team capacity, systems and processes that provide for the best execution capability (or least execution risk). Towards the end of the preparation phase, the startup starts calibrating its capital needs and other requirements like hiring, partnerships and channel acquisition needs that will allow it to grow sales period over period with high degree of predicability. As it sees its ability to predictably increase its revenues over a few periods by using few key business levers, it is ready to have a conversation about scaling-up revenues (or traction).

The main job of the early stage investor (whether incubators, accelerators, angel or fund) — is to hold back the founders and startups from recognising revenues too early and scaling prematurely. In an eco-system where every conversation with investors and most others starts with, “do you have revenues?”, founders face immense pressure to get to safety by declaring revenues to investors especially if they do not have adequate capital to stay afloat.

Speaking of staying afloat — the key to learning to swim is getting comfortable with the feeling of drowning and not holding your breath (best done in shallow waters) — any push to scale prematurely and you might find yourself in deeper waters with most probably some additional weight (hires, cash burn) not having figured out how to swim and praying that you can stay afloat till someone stops by to throw you some more capital or pick you up!

A humble request to all the investors (and LPs) in search of the elusive startup with the hockey stick growth — the hockey stick starts with a curve downwards - towards investing in customer discovery and team capacity building - it might be accompanied by some sales but if you want to improve the probability of high growth sales please stand by your startups and entrepreneurs as they go through the customer discovery process. Therefore the catapult analogy - work with the founders to product-market fit and then unleash their potential for hockey stick growth. Please don’t throw them in the deep end as soon as you see signs of sales. Only shear dumb luck kept afloat by capital can save them.

Each new product or market you add to this equation fragments much needed resources especially the founder’s attention. So, the second job of the early stage investor is helping the founder maintain focus on a singular product and market till they get to product — market fit or decide to pivot away from the product or market.

Finally, while, it has become cheaper to startup and there are a lot of lean methodologies (thanks to Eric Ries) floating around - there is still no prescriptive amount of capital that all startups need to get to product-market fit and becoming ready for scaling-up. Any investor’s standardised ticket size (including ours) by the stage of startup - reflects the investor’s internal capital allocation by stage and reserves for follow-on investments and their risk appetite based on their historical experience in investing in startups. It is important to understand where they are coming from and how your startup’s story might be different from the other (ideally similar) startups they have invested in. If all the investors in startups ‘like’ yours expect your startup to get to a scaling-up revenues phase with at most $[X] of investment, you are going to have a hard time getting them to invest $[2X] to get there unless you make a good case for it. If you take the $[X] and don’t get to the point where you are ready to have a conversation about scaling-up revenues, you are going to have a still harder time convincing any new investor to bridge you for the $[X] that you didn’t raise. My advice is to go with the former, you will get the right investor, a higher chance of success and conserve your limited entrepreneurial years.

To all the startup founders out there in search of revenue, next time you sit down with an investor and he/she asks you, “Do you have revenues?”, if you don’t have revenues, please respond with — we have customers and we have sales and share the things you have learnt from you customer discovery journey and all the instances of customer delight you have created. Stay focused on the hunt for product-market fit and revenues.

Most important of all — Remember to Breathe!

(this was first published as a LinkedIn post by Karthik Chandrasekar on his LinkedIn profile)