in Big Ideas

Early stage companies don’t need money, they need customers

Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

CC BY-NC-ND-20 Some rights reserved by wallyg

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The popular belief in Canada is that the tech startup world has been fairly light on investment dollars relative to other industries in Canada. Because there is such a disparity in seed or angel round investment size in Canada vs the US people tend to point to that as a reason people go south. The perceived result of the funding problem (and likely the weather) is that there are 350 000 Canadians in the Valley. No one can argue the talent to build global calibre tech companies exists in Canada (or at least has Canadian passports) but you can certainly argue Canada lacks that certain something to keep them here.

Five years ago Paul Graham observed that the total cost to get a tech startup started had dropped dramatically and will continue to do so.

So my first prediction about the future of web startups is pretty straightforward: there will be a lot of them. When starting a startup was expensive, you had to get the permission of investors to do it. Now the only threshold is courage. – Paul Graham, 2007

There is a lot of attention around getting young people money but does that help them? Does that keep them in Canada? I would argue that the ones that do need and can use capital don’t pull up stakes and leave town for the investment. They leave town (or the country) because they are missing something more valuable than money — customers, mentorship that helps them get customers, and a network of peers.

Know thy stage

The problem with comparing funding deal levels in Canada and the US is that it ignores the stage the company is in relative to the stage of US startups raising money for the first time. The Startup Genome report 01 and the Startup Genome Compass offers startups an excellent way to measure themselves against a benchmark of over 3 000 startups. In the report there is a table (shown below) that gives you some overall averages for all startups.


From the Startup Genome Report 01.

In last seven years of being involved in the Canadian startup community (mostly in Waterloo) and in the last three years leading what is arguably the best student focused incubator in Canada while founding my own startup. I saw dozens of companies peek into the Discovery phase, a few move on through to the Validation phase.

What I have seen happen before the discovery phase:

  • Talk of raising money is used to pull in a large group of talent.
  • Focus is not on customers, it is on technology or raising money.
  • There is little help by way of mentorship that takes the time to understand the dynamic of the group.
  • Mentors focus on finding a way to get them money so they can work full time.

What founders fail to do:

  • Define the problem.
  • Find out what people are looking for.
  • What else do they need in a system?
  • Determine what they might pay for it by getting them to pay for it and talking to our customers.
  • Measure, iterate, repeat.

Startups need to focus more on customer acquisition and growth in Canada, enough talk about raising money

There are so many business plan and pitch competitions one could make a career out of attending them. This gives a false sense of success because the ‘winner’ is determined on a lot of factors except their ability to actually get customers. The game becomes about (and has been it feels like) how to put together a report on an idea (business plan) and present in a way that makes you look confident.

The game is really about getting lots of people to give you their money because you provide value to them. What makes you better than others is that you are chasing a much bigger problem that will provide value to a full percentage of the world’s population. Bonus points if you change the world.

Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

  • http://twitter.com/GrokIam Lynn Sutherland

    Even if you have customer capital it is very very difficult to raise post-angel capital because there are very few sources of tech investment capital in Canada.  At times there is almost $0 startup investment funds in Canada and the only thing to do is to go hunting in US and if successful, often move to US.  We need more risk capital for companies that want to stay in Canada.

    Companies seeking investment should have established a paying customer base, and believable marketing and business plans.  Only then should they seek investment. I agree that some startups don’t understand that they need customer and reveune to attract capital.

    With all due respect, sure you have to have customers, money doesn’t create customers, but in Canada, there is so little risk capital and knowledgeable tech investors that I think the main problem is the availability of risk capital that knows what a good tech investment is.  We have very few players in this area.

  • http://onlineguitarcoaching.com Will Kriski

    I love this post! I invested in a great guy and an idea a few years ago, never again! :)

  • http://www.francis-moran.com Francis Moran

    Great post, Jesse. It parallels something I wrote a few months ago about how most startups are in a neck-and-neck two-horse race for the funds needed to underwrite their business plan but that far too many put all their hopes on just one of those two horses. You can see the full post here: http://francis-moran.com/index.php/marketing-strategy/the-two-horse-race-most-startups-dont-even-realise-theyre-running/

  • http://www.markevans.ca/ Mark Evans

    It’s a bit of a chicken and egg kind of thing. Startups think if they can raise capital, they can drive sales; or if they drive sales they can raise capital. I’m always encouraged to come across startups with a focus on getting people to buy their product or service. If they can do that, then attracting capital is an easier task.

    Mark

  • Joseph Bowes

    Or, put another way, you are not really an entrepreneur until you have ‘real’, ‘paying’ customers.

  • Rthompson

    Great insights on the what
    is needed for a startup to become a viable, sustainable business.  To explain further, a company needs great people and product (with a compelling value proposition), etc.  – to improve the probability of getting Customers and generating revenue.  

    Because of the amount of work, knowledge, etc. needed to be successful is why it takes a very competent team with high ambition that is results oriented and makes changes to maximize the opportunity and prudently manage risk.

    Given the ratio of “successes” to “attempts” – it’s obvious this is a work in progress ….

    Ron             (www.cail.com/angel)
     

  • http://whoyoucallingajesse.com/ Jesse Rodgers

    What if there are too few good tech investments in Canada for the capital that is here?

  • John

    Just another data point:

    One of the companies I started grew quickly to 25k users. Before I had even started down the path to talk to Canadian VC I had several VC from the US contact me, and I accepted an offer from an investor in San Diego.

    At another company I co-founded in Ottawa it turns out a Canadian company took the initiative and we wound up selling to them.

    I think there is value for an investor to find and talk to new startups that are growing their customer base.

    It would be nice if there was a single place where startups could advertise the _real_ number of users they have so it would be easier for VC to take the initiative etc.

    Would any investors be interested in such a site? Or does one already exist?

  • Michael

    This is a great post Jesse. I could not agree more.

    I need to look more at the % growth base lines and kinds of customers to get myself and our team in tune even more with this thinking. But at Cdling.com we are a perfect fit for phase two and have not had one fundraising meeting yet (though we do have our first one scheduled and as the chart clearly shows, the risk to the end of phase two is a $2-million journey).

    We have struck an agreement with LeanLaunchLab.com to be their first Canadian Channel Partner. This is a great suite to replace the traditional business plan, coordinate the support and timely input of investors and advisors and focus startups on reducing risk, moving the business forward. More importantly, it positions Cdling in the lean start up, customer development camp.

    When a user first joins Cdling they could be under the misconception that we are trying to focus startups on fundraising. In fact, it is just the opposite. Our first milestone questions are about sales traction and the viability of the business. The next milestone question asks will this start raise angel financing.

    However, the idea behind Cdling is that startups can focus on doing the customer development that you are describing because that is the best way to relate to the market that you are worthy of an angel round. Cdling is all about reorienting startups to global markets instead of the beauty pagents and government funding that can take thier attention away from building a global business.

    On a side note, every time that I talk about the Ontario Cross-border Tech Innovation Ecosystem study while I am attending evening events up and down Silicon Valley during are stint in the Canadian Tech Accelerator Program, everyone compares it to the Startup Genome Project. Not because we studied the exact same factors to successful innovation but because it is the Silicon Valley example of an initiative instigated by entrepeneurs, draws together experts and info across institution and continues with sponsorship from leading investor groups, law firms and the like who all benefit from a healthy growing ecosystem.

  • http://twitter.com/GilKatz Gil Katz

    There are small, medium, and large targets. If a startup plans to reach a large target asap then they need a lot of investment. If they plan to grow organically, reaching small, then medium, and then large targets, then they may even be able to grow without any investment at all. There is a lot of hype for ‘all-or-nothing business plans’ and that’s confusing a lot of young people, leading into various traps.. very successfully.. reaching ‘nothing’ results fast.. :)

    Meanwhile, if you just build a good product that customers actually need, then you should not have a problem selling, delivering, and financing your next step using your profits.. in theory at least. Doing this in reality is just a lot of work, that may seem like a waste of time if you could just raise a huge round of finance and play a totally different game. Meanwhile many startup products are not really very useful and don’t have customers lined up, waiting to buy, before many months of product dev is undertaken.

    I suppose one example may be the Bloomberg machines, that were initially based on a sort of ‘letter of intent’ to buy a machine if it existed in 6 months or so.. (I think that was the story, at least).. that’s probably the best way to build a startup.

  • http://twitter.com/joellessem Joel Lessem

    Could not agree more.  There is an over fixation on technology and strategy – from both the entreprenuers, media and the investment community.  There needs to be much more focus on customer aquisition and commercial execution.  From our experience raising capital is easy if you are signing lots of customers (even in Canada!)

  • http://www.linkedin.com/in/gerrypower Gerry Power

    Don’t agree. The total renumeration package the best talent is getting in US startups, far exceeds the going rate here. We lose the best talent to the best US startups all the time. It’s not as simple as money of course, but that is a big part of the reason our exceptional talent pool is so low.

  • http://profile.yahoo.com/XDCBCJL2R5JJWCXETQ4KICILVM Ovidiu

    Lynn is right. Each company is different and the lack of risk capital means that excellent opportunities may fly away (south or elsewhere). To expect a company that does world class research for over a decade to be in the same category with the candidate for an incubator is what is wrong with many investing companies. Not every product needs 1 year to be built, some may take 6-7 years; if someone may wonder what product would that be, I can say that is the kind that disrupts at least a couple of industries and makes every competitor loose all their sleep. 1 trillion dollar worth in exchange for some meager risk funds. Well no wonder the Government is spinning its wheels and revamping all the research, NRC, IIRC, SRED and many funds are coming to Toronto. 

    In the end the question is where the capitalization would take place, in Canada or elsewhere. We will soon find out.

  • http://whoyoucallingajesse.com/ Jesse Rodgers

    Commercialization of research is a different problem but certainly deserves attention. The potential problem with government funding is that they might be asking for the wrong metrics. Expected outcomes drives the business — even with companies that need 6-7 yrs to get to market. If the expected outcome is more research, create IP, raise capital, etc then that is what the organization will be tooled to do. The switch to selling product gets harder with time.

  • http://whoyoucallingajesse.com/ Jesse Rodgers

    That is pretty cool to see how your research has evolved. I would love alpha access ;)

  • Pingback: » Early stage companies don’t need money, they need customers | StartupNorth « Tom Denison's Blog

  • http://profile.yahoo.com/XDCBCJL2R5JJWCXETQ4KICILVM Ovidiu

     Assuming is always best, isn’t it?

    In time you will find out, too.

  • http://www.getsnappay.com/ Jim Rudnick

    @Jesse….this is one of the best posts I’ve read in a long time (since Fred Wilson’s post that is so similar rationale wise) about the “real” challenge of early startups – and yes, it’s the customer acquisition tactical battle! As a new startup we too fight daily for some traction to try to get early adopters to just “try” our mobile POS payments app….and when they do, each and every one of them is celebrated! Hard? Yes! But one of the basic foundational building blocks of any startup on it’s road to early adoption! :-)

  • kareem

    I think remuneration is a canard.  The real issue is interesting, impactful businesses.  Other than RIM, what $100M or more tech businesses have come out of Canada.

    In other words, if you’re a talented engineer today, want to work with other talented engineers on something interesting, where are you going to go?  

    If a behemoth?  Google or Facebook.  

    If a company that’s found PM/Fit?  Dropbox, AirBNB, or 100s of others.
    If a pre-PM fit company?  Pick any from the 100s of interesting NY, LA, and SF-based companies.  

  • http://whoyoucallingajesse.com/ Jesse Rodgers

    Glad you like it… and yes I should link to Fred Wilson’s post. I inspired by the mad focus on ‘learn to pitch’ competitions and the small industry built around business plans. 

    I think the hardest thing about product development is getting that first few people to use your stuff. Not just give it a try but really use what you have built and give you feedback. It is good to celebrate it ;)

  • http://twitter.com/MyInfoMatrix Pavan Kanwar

    Well said.  Especially: “The real issue is interesting, impactful businesses.”  If it’s truly high impact it should have sufficient impact on the customer to place an order.  Not all startups are software based or can adopt a Freemium approach, so traditional challenges to fund prototyping still apply. However, rapid changes in the way the world works – like for example kickstarter.com are starting to disrupt the traditional chicken egg / two horse races.  If you have something great, great people will see that and help you.  People are surprisingly helpful and giving.  JDI.  Just Do It!

  • http://twitter.com/MyInfoMatrix Pavan Kanwar

    It feels the same in the UK.  So much so I am planning to move to SF.  Hopefully Canada and the UK catch up soon.  I know our Department of Media, Culture and Sport are still asking why founders leave the UK for the US.  There is a big gap between policy makers, investors and tech over here whereas in the US Entrepreneurship leads and drives progress.  I hope this starts to change.  Our original Dragon Doug Richard was commissioned by the Tory Party to write The Richard Report. I’m not sure his suggestions have been comprehensively addressed. More established entrepreneurs like him are needed over here.  We have seedcamp which is fantastic and leading the way, but I have still applied to YC and still plan to move!

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