Part 3 – Find Your Customers and Investors May Follow

December 9, 2009

How do you achieve market validation to satisfy the requirement posed by many investors these days? The bottom line is that investors want early revenue or a lot of early adopters. No one believes in the old adage “If you build it, they will come”. A more appropriate saying for today is “If you want the money, you better prove it”. It’s difficult to win customers over regardless of whether you’re a start-up or an established company. One thing is for sure, you can’t gain customer acceptance if you don’t seek them out.

THE GOOD AND THE BAD OF FREEBIES

The freemium model is a popular approach. This amounts to giving away your product to customers and getting a basic functional version into the hands of customers as soon as possible. The belief is that it is more important to find out what your customers think about the product quickly then it is to develop a full version with all the bells and whistles. The version of the product with the more advanced feature set is sold at a premium. I heard mixed views on the freemium model. Some investors view it negatively because they consider it a sign the start-up does not have a valid marketing and sales strategy. In this case, the freemium is viewed as a “we’ll figure out how to make money later” approach. The dot-com lessons still linger in the minds of some investors where there was unlimited demand for free and no one was ever willing to pay. On the other hand, there are those who say there are plenty successful companies that gave away their service and monetized it after they had an substantial following.

SELL OTHER COMPANIES’ PRODUCTS FIRST AND SELL YOUR OWN PRODUCTS NEXT

Reseller of other company’s products is another way to realize immediate revenue. The start-up gains immediate access to customers, which is crucial to developing their own product line and will already have a customer base to sell into when their own product is available. A small company can offer better pricing due to the lower overhead of the company. Some start-ups have approached the reseller method by offering single or smaller quantities of the product, where the established or direct supply channels only offer bulk or large bundles. There have been lots of start-ups that began this way, particularly those that were bootstrapped.

WHERE ARE THE BLACK SHEEP OF THE CORPORATION

Established corporation have business units that are not in the core competency area and are willing to rid themselves of these businesses. In this case, you’ll be raising money to buy an unwanted business unit with revenue and then launch a development effort to introduce new products. The advantage is you already have a company with immediate revenue and customers.

FIND THE CUSTOMERS THAT ARE OUTLIERS

Find unaddressed customers who are considered to be outliers by the large established players in the market. As a start-up, it is difficult to win large customers. Large customers want to reduce their risks – they want to guarantee their suppliers stay in business and can support them over the long haul. Most large companies have bureaucratic supplier approval processes that can take many months to work through. Also, sales cycle into large corporations can be lengthy. Large customers want to interact with suppliers at the same corporate life stage as themselves. For a start-up to sell into a large company they must find someone who will be their champion and there’s more personal glory in being a champion of another large company than a start-up. Many start-ups have won large customers by first selling into the small or medium sized customers that the large players don’t want to address. Once you have enough small customers, the large companies will notice the start-up.

PILOT PROGRAMS

Pilot programs work well in localized areas or in specific industries such as healthcare. It is often better to dominant a local area and then expand from there.

There is no right answer; different types of products may require different approaches to market validation. If you want to win over investors, you must first win over some customers.