Should early stage startups worry about generating revenue? Why or why not?

By Zeeva Viola | August 22, 2017

Question:

Should early stage startups worry about generating revenue? Why or why not?

Answer:

Yes, absolutely, and as early in the product development cycle as possible.  The process of migrating a ‘user’ to a ‘customer’ will reveal the answers to several vital questions about your business and it’s viability.

Here are just a few questions even attempting to generate revenue will answer (There are hundreds more, but I think you’ll get the point…) For simplicity, I’ll use a SaaS project management software product that you plan to sell for $5000/year per seat, targeted at mid-level product managers.

1. Is my target user able to approve the budget expenditure, and where does your product fit into the user’s budgeting process?  

By seeking revenue, you’ll find out if the target user (the mid-level manager) is capable of approving the $5000 budget amount herself, or if it needs to go up the ladder to that person’s manager or division president.

If so, then you may be required to host a second (or third or fourth…) sales presentation to the user’s manager or division head.  That person will likely have a completely different set of usage requirements and objections that you will need to overcome before getting the order.

Many companies have specific cycles and budgets allotted for new purchases.  If your project management software is not a replacement for an existing cost and your target user doesn’t have budget available, you may end up waiting until next quarter or next year before you can actually complete the transaction.

In the sales process, you’ll be able to start identifying gatekeepers vs. decision-makers.  This is HUGE when it comes to understanding opportunity pipeline projections from introduction to closed sale.

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2. What legal, contract, and due diligence requirements are needed?

You might be expecting that you can simply send over an invoice and it gets paid by the user’s company. Or, you’re expecting the user to charge the expense to a credit card and just expense it on their own budget.

But, the user’s company might require a list of due diligence requirements from you including proof of up-time, server security, and protection of any proprietary information shared in your project management software. The user’s company might require a license agreement and contract, even if you’re not requiring one.

This all adds overhead and administrative cost to the sales process to you and your company.

3. Is the product priced correctly?

You’re expecting to sell the license for $5000, and now your free users during beta stage that told you time and time again that they’d “easily be willing to spend $5000 for your totally awesome product” are balking.  Too many start-ups depend on hypothetical survey questions with regard to pricing.  You cannot depend on what people say they will do.  The only way to validate a price is to actually sell the product.

Alternately, you might have every new customer tell you – “Wow! $5000? That’s it?  Send me the invoice and I’ll have that paid by bank wire transfer in two days!”  Then for your next batch of leads, move the price up to $6000 or $7500.

4. Can you sell to the other 95% of adopters?

In every industry, there are early adopters that always use the latest and greatest innovations.  By selling to these early adopters, you’ll start to see patterns in their objections or even hear comments like – “I love your software. A lot of people I talk you in my position at other companies might want to see more features or have problems with such-and-such functionality that you have, but I can work around it.”

This reveals potential objections from the mass audience that you ultimately need to reach in order to explode sales.

4b. Is is a “nice-to-have” product or “gotta-have” product?

Enough said. Money talks.

5. How quickly can I get to cash-flow positive or profitability?

For every start-up whether VC-backed, angel, friends & family, personal savings), getting money to finance your growth is a huge boost to the life cycle of the business.  Every dollar you earn is one less dollar you have to spend from investors and savings.  

When you generate revenue, you’ll be able to adjust your business model for customer acquisition pace, price adjustments, billing cycles, cancellation and attrition rates, and other aspects of your business model that only theoretical until you start generating revenue.

**This Q&A article was originally posted on Quora. Check out Scott’s Quora page here.