In this first article of a series, I'll share insights on "Fundability" — the process of preparing for funding. Drawing on real examples from my client experiences, I aim to highlight valuable lessons for startup CEOs navigating both funding and growth phases.
One client, an enterprise software solution focused on enhancing innovation and collaboration, had attracted interest from two potential customers: a well-known European airline and a mid-sized UK food and beverages company. The excitement was palpable as the CEO approached breaking the classic startup catch-22: needing social proof to sell but requiring sales to gain social proof. He was thrilled and nearly prepared to sign contracts with both parties, but first, we created a straightforward comparison table to evaluate the two potential customers (see Exhibit 1):
Customer Comparison Criteria:
- Logo Impact: The large airline's logo was significantly more impactful, potentially attracting investors and demonstrating market fit with major clients.
- Expansion Potential: While the airline offered limited expansion opportunities, the food and beverage company, part of a global conglomerate, showed substantial potential to implement the solution across other subsidiaries.
- Implementation Ease: Implementation at the airline would take 6-8 months and require a customized approach, whereas the UK company could implement the solution in about 2 months with a more standardized approach.
- Localization Ease: The airline required a comprehensive localization, posing significant costs. In contrast, the UK company needed minimal adjustments, crucial for a resource-limited startup.
- Annual Recurring Revenue (ARR): The airline promised an ARR of $68K compared to $29K from the food and beverage company, suggesting an immediate financial advantage with the airline.
- Support Simplicity: The airline's support needs were considerably higher, impacting startup resources.
After analyzing these factors, the CEO concluded that despite the allure of the prominent logo, choosing the UK company was wiser from a valuation tipping point and resource management perspective.
Decisions vary among CEOs; some might opt to engage with both customers, potentially overextending, while others might follow their ego towards larger logos. In this case, the CEO's strategic choice not only sustained but also significantly grew the company, achieving over $10M in ARR post-second funding round.
From my experience, here is what investors will find valuable and comprehensible when navigating this dilemma (see Exhibit 2):
Advice for Resource-Strapped Startups Facing Customer Choices:
- Focus: Target fewer, more strategic customers to avoid overstretching resources and disappointing clients. Concentrate on overdelivering in a narrow market rather than extending too broadly.
- Caution Against Prestige: Don't let prestigious logos cloud your judgment. Prioritize a lean approach to product-market fit, considering the time and financial impacts of implementation and support.
- Seek Scalable Deals: Look for "cookie-cutter" opportunities that allow for expansion and repeat business. Start small and prove scalability before pursuing larger enterprise clients.
- Avoid Customization: Minimize tailor-made implementations to control costs and complexity.
- Manage Expectations on ARR: Early-stage ARR discrepancies are less indicative of long-term scalability and profitability. Focus on building a solid foundation for future growth.
In subsequent articles, I will delve deeper into effective strategies for funding preparations based on extensive field experience.
