Regardless of whether you are a reputable company or a startup, the consequences of a weak business model are the same. For the existing company, it is the inability to recognize that the company’s business model is no longer relevant and the subsequent failure to turn around will ultimately doom the company. For the startup, it’s convincing yourself and potential investors that you have a business model that will ignite or disrupt an industry, but with no early revenue, and that’s potentially doom.
The graveyard of startups is full of companies that failed to generate early revenue. Failory lists 67 startups that failed, possibly due to a poor business model and lack of early revenue. For startups, the difference between surviving and running out of the runway always comes down to turning cash flow away. Why? Because when you’re in the middle of the startup run, it’s pretty easy to fall into the trap of wasting time on feel-good tasks that feel like progress but don’t make any money. Maybe it’s building partnerships or focusing on good PR. Maybe you’re focused on “victuals” that look good, like 40,000 website downloads, but don’t bring real revenue.
If you think that a startup’s chance of survival depends on how quickly you can generate revenue, then you don’t have to do anything but generate revenue quickly. Here are some things to keep in mind to get income quickly.
Don’t raise investor money too early. Raising money is not the same as generating income. Look for ways to generate real revenue with an early client to test out not only the business model, but also the product or service. No one pays you for a business model. Test the benefits of your product or service with early customers who are willing to pay and adjust accordingly based on customer feedback. In addition, you keep your valuable assets for when you really need it.
Build the product, not the company. Don’t waste your early time and effort building a business with an expensive website, an office space, a cool T-shirt and a host of other unnecessary things. Work from home, a co-working space, or a friend’s office (free) and put all your energy into building the product or service. Test that with paying customers. Remember, no matter how cool your brand, your mission, or how far your business plan goes, you’re not an entrepreneur until someone pays you money for something you sold.
Go to work. In the beginning you are the product developer, marketer and project manager. Don’t get ahead of yourself and hire several employees before you have any revenue. Use friends, freelancers if you have to, but don’t build a team until you can afford it. Use SaaS tools, simple financial software and sales hutzpah to get your first paying customers. If you have them, lean on mentors and advisors for advice.
The first version would be ugly. Don’t try to create the perfect product or service, because with that mindset you will launch. Bring it in well enough and test it with early customers. Reid Hoffman, co-founder of LinkedIn once said that if you’re not a little embarrassed about your first version of your product/service, you’re launching too late. You need the early feedback from the first customers to create the next refinement or possible pivot. Narrow it down to an important feature set for your first customer segment. Then collect the money, come up with the next priorities based on what works and what breaks, and move on to building the next feature.
Execution before innovation. When you think of successful startups, they started simply by doing or testing something. In the beginning it may not have been about innovation, but more about execution. The co-founders of Airbnb rented their own bedrooms during a busy weekend in San Francisco to test whether someone would actually pay them for their rooms. They didn’t have a fancy website, a sophisticated algorithm, other cross-sell services, etc. They were just testing the idea that people would pay to rent their room for the weekend.
Focus on your first 10 customers. In the beginning, focusing on TAM (Total Addressable Market), SAM (Service Addressable Market), or SOM (Service Obtainable Market) may have looked good in a pitch deck, but to generate revenue quickly, you really need to focus on your first 10 customers. Who are they, where are they and how can you close them? You may be in a multi-billion dollar marketplace, but you need paying customers fast. Learn from the first ten customers and then move to 20 customers. Learn from them, then move on to 30 and so on until you have definitive, repeatable, scalable revenue streams.