Launching a start-up? Here’s why you should focus on early sales

Passionate about entrepreneurship and innovation, Charles Naud, Innovation Matchmaker at Synoptic Technologies, uses his experience and exposure to London’s start-up scene to reflect on funding against sales strategies.

This post originally appeared via the ENDuRe newsletter

Raise or sell?

Companies in general have two lifelines: they can either generate profits through sales or receive some type of financial backing. In the world of start-ups, financial backing is synonymous with a high growth strategy and one main objective: monetary gains. Sales, on the other hand, are a sign of market demand and subsequently lead to your idea being implemented. In other words, sales mean product success.

Obtaining funding is far too often perceived as the most favourable means of sustaining a start-up. So much so, that some entrepreneurs seemingly embark on their venture with only one goal: raising series after series of equity funding.
Sure, it feels good when someone is willing to invest in your idea. Receiving a bucket-load of money could also be a medium for you and your team to lead a semi-luxurious lifestyle for a while, if no one is watching that is. But how long does this cardboard glory really last? Raising funds is not necessarily a measure of how well you are doing. It’s just an indicator that you fit in an angel or venture capitalist’s portfolio strategy. It can also be another way of saying that you have given up a large proportion of your business, and some rights in running the business the way you want.

Surprisingly, if you’re a good fit for equity investment, the odds tend to be against you. Some venture capitalists typically have investments tied up in about 20 to 30 start-ups at any one time. Most of these start-ups will have a high-growth potential and that’s exactly what the venture capitalist will want you to go after: exponential, quick growth. The venture capitalist will therefore dictate your company strategy by focusing on a rapid increase in revenue and profits, at the risk of you crashing and burning fast. A rule of thumb is that venture capitalists only need one star company to generate sufficient returns for their entire portfolio. So, if you have received venture capitalist funding, there is a 75% likelihood your start-up will fail (read the Wall Street Journal article written in 2012 by Shikhar Ghosh, Senior Lecturer at Harvard Business School). In short, venture capitalists don’t necessarily understand or share your product vision, many just see a high-growth potential, which they want to achieve fast or move on.

Similar arguments could be made for other types of funding. Crowd funding, for example, certainly democratises the start-up world and is a great source of feedback for companies. However, it does not necessarily reward those who are likely to be successful in the long-term. It arguably favours companies with the most marketable crowd funding campaigns, which is often dependent on an offering that is easy to explain in laymen terms. Other examples are government funds and grants. In many instances, these are driven by a political agenda to promote entrepreneurship and remove barriers to entry. They don’t actually focus on the success of start-ups. The UK Government Start-up Loans scheme is a prime example of this. It helps budding entrepreneurs to get set up without providing the required training and infrastructure that are paramount to success.

Another problem with early-stage funding for start-ups is that it requires time to prepare pitches, create campaigns and apply for grants; time that is not spent building the business.

Always be closing

Working towards sales, however, is rarely a waste of time if done right. By talking to potential customers you almost always learn something either about your target market, your product or your competitors. Think about how the first scheduled call with a prospective client is commonly referred to as the discovery call. This call is designed for you to understand who you are talking to and identify the gap that exists between their needs and your offering. It is therefore an opportunity for you to discover how you can bring value to specific customers or an entire market segment. So even if you don’t close a deal in every sales meeting, the acquired knowledge will help you improve your sales strategy.

Sales calls and meetings also provide an opportunity to validate your offering. The single, most common advice for start-ups nowadays is to stay lean. This strategy maintains that you should start off by only creating a minimum viable product, based on what your vision is and what clients will purchase. From then on, enhance your offering based on what customers are willing to pay for and will actually use (note: don’t sell something that won’t be used, you’ll only end up disappointing customers). The only way you can obtain sufficient feedback to do so is by getting your product out there and talking to clients and prospects. This is arguably the safest and fastest method to creating a successful product.

So, investing time in sales not only helps to develop the killer pitch, it also helps to deliver a killer product. After all, isn’t this is what your vision was about? So, why aren’t start-ups focusing their resources on sales?

The problem may lie in our perception of what entrepreneurial success looks like. There are well-publicised, so-called success stories of start-ups receiving millions in investment, and even exiting, without revenue. Paciniain, a North Idaho hardware start-up, raised $6 million and even exited for $20 million before making a single sale in five years of activity. Articles about Pacinian point to the favourable treatment such stories receive from the media. This type of hype only encourages similar behaviour amongst entrepreneurs; that equates success with funding, rather than sales. Ironically, investors tend to use sales traction as the number one indicator, which leads to better valuation and investment.

A further barrier to start-up success lies in their recruitment strategy, as many don’t see sales as core to their business. In the digital age, and certainly so in London’s tech city, a large portion of entrepreneurs have a technical background and lack the basic skills required to bring a product to market. It’s frustrating to see how much time and effort is spent on finding the best engineers or developers, but there is little focus on hiring the killer sales person. Typically, start-ups hire inexperienced business graduates, offer them a commission-based salary and see how long they last – not exactly a recipe for success. You are better off taking sales seriously and hiring accordingly.

The image of entrepreneurship is at an all–time high. In part, this is due to the fall from grace of the corporate culture and due to promises of high rewards, Coronas and Ping-Pong tables, as so often documented in the media. The reality is not so sweet. A poll by CB Insights revealed that an overwhelming majority of start-ups fail because of a lack of market demand for their product. If entrepreneurs want to succeed, they should spend more time on sales and less on product development. Not only will this help avoid failure, it will also help create a great product that customers want, like and use.

This post originally appeared via the ENDuRe newsletter:
http://www.endureproject.eu/download/newsletter_ENDuRE_2.pdf

Charles Naud is innovation sourcing manager at Synoptica. Synoptica is a leading SaaS platform that helps organisations to uncover, rank and engage with innovative SME’s.