If you could pick just one asset, what would you say is the single most important thing you need when setting up a new startup business?
A great idea?
A wonderful product?
A good user experience?
A cool brand?
The best tech?
An amazing founder?
Actually, it is none of these things.
As people who others often associate with startups, we at DQventures regularly field the question: “what’s the magic ingredient?” ... What is the one factor that can mean the difference between a company’s failure and success?
Of course, there are many important factors, and those listed above can each play a crucial part. But actually the answer is very simple: sales . Before you stop reading, this is not as obvious as it might sound.
A startup that proves it can repeatedly sell its product or service is far more likely to succeed than one that doesn’t. But why?
The answer is cashflow. Although people sometimes think of startups as being different to other companies, they are still just businesses. And businesses cannot survive without cashflow. So where do startups get their cash? Well, they either spend from the balance sheet, after receiving an investment or a loan, or they generate cash from revenue.
“Sure,” say seemingly 90% of the people you meet as an angel investor, “I’ll just raise funding and everything will be fine. Here is my great idea, please can I have some money?”
But it doesn’t work like that, as most of those people soon tend to find out.
Please note: this is the single, most important lesson you can learn as a wannabe startup founder, so please don’t dismiss it as obvious. Most founders think that they’ve given revenue due time and attention, but the truth is that very few of them really grasp its importance.
Why is sales so important?
Because demonstrating that someone out there is willing to pay money for what you’ve invented is the safest and easiest way to create cashflow for your business. Either, you sell the product in such quantities and on such fabulous payment terms that you’re able to fund salaries and product development with your revenue (unlikely); or, you’re able to show potential investors that you have proven, without doubt, that people will buy your product. This is what most investors need to see before they fund you – proof.
In fact, what investors really want to see is a combination of sales (or "traction"), a huge potential market, attractive unit economics (can you sell the product for more than it costs you to deliver it?), and acceleration. It needs to be a "no-brainer". Founders that can deliver the above raise funds with relative ease. Everyone else struggles.
Unfortunately, in so many investor pitches, sales come across as an afterthought, or are taken for granted completely. First-time founders are invariably so smitten with the genius of their idea or product, that they fail even to think deeply about who’s going to buy it and why, let alone go and speak to customers, or actually try to sell to them. This, I believe, is the single reason why many startups fail to get funding. Too often, founders just assume that, with a product this great, of course people will want to buy it.
Investors are rarely so easily convinced.
Too little too late.
The most unfortunate founders only learn this lesson after they get funded. Somehow, through a mixture of salesmanship, charm, and charisma, they manage to convince people - usually family and friends (and fools, as the saying goes) – to part with their hard-won cash. They talk in generalities, predict 3-to-5-year exits, and throw around words like “billion” and “unicorn”. Sure, as a relatively inexperienced investor, this can all seem pretty intoxicating. We imagine ourselves buying that boat, paying off a family member’s mortage, and not needing to work, ever again. But for the founder, this is not a good thing. This type of hype-driven fundraise should not be encouraged or celebrated. It should be avoided at all costs. That’s because, by the time it comes to selling, it’s already too late. The money has been spent, the MVP has been built, and only then does it become apparent that nobody wants it.
As a founder, there’s actually only one person you need to convince: you.
Most experienced investors, thankfully, won’t put money into an idea. Unless the founder has been there and done it before, has a ready-made network just waiting to get their hands on his/her latest invention, and has institutional investors lining up to back the venture once it launches, these types of funding are rare. And that’s how it should be.
You see, as the founder of a brand new business, there’s actually only one person you need to convince that your idea will work – and that’s you. And by convince, I don’t mean get all excited, I mean remove 99.9% of doubt.
So often the best investments are those where there is an experienced founder, who chooses to give up a highly-paid job to tackle a specific problem they are 100% convinced they can solve. Such entrepreneurs are few and far between.
Most founders, if they take a long, hard look in the mirror, will realise that they still have serious doubt. If that’s you, why would you ever want to accept money from family and friends? Surely it’s better to spend more time convincing yourself? In most cases, the best way to de-risk your startup, and to create that much-needed proof, is to start selling your product before it’s even built.
There are hundreds of reasons why you may choose not to follow this advice. “People won’t buy it unless they can see it,” is probably the most common. But ask yourself if you’ve done all you possibly can. How else can you prove there’s a market for what you want to build? I expect you’ll find there’s something you haven’t tried. Maybe get a bunch of LOIs signed. Ask your ideal customer to be a co-founder. Fake the product with a landing page and Excel. Hire a team in India and do whatever your product is supposed to do manually. The best founders invariably find a way. They create proof, they raise capital, and they don’t look back.
Hopefully you can be one of them.