Last week, I caught up with an entrepreneur, and we discussed milestones for his startup. In this case, they had raised a seed round, and have been building the product for several months. The big question we discussed was: What does it take to raise the next round of financing, and what milestones should we be aiming for? We talked about the pros and cons of aiming for a recurring revenue target or a certain type of customer profile target. But ultimately, at this stage of the journey with no revenue and no paying customers, the most important thing is to sign 10 unaffiliated customers who pay something as the next milestone.
The reason this is so important is that right now, there’s a belief from market trends and some customer discovery that there’s a need for the product and solution. With no paying customers, it’s difficult to prove credibly that there is, in fact, this market opportunity. Instead of aiming for $1 million of revenue or some larger aspiration, it’s more important to get 10 unaffiliated customers that love the product. They will be a testimonial for the product and willingness to pay, even if it’s far below what the market will eventually command.
With these paying customers, it’s easy to extrapolate out how a small but fast-growing market achieves scale in the next 5 to 10 years. Ideally, there will be a huge number of potential customers. By having the customers pay at least something, even if it’s a beta, it demonstrates that there’s real skin in the game and a meaningful problem being solved.
Too often, entrepreneurs try to sign free “customers” in an effort to get the product used, and that usually doesn’t work. It’s much better to have the customers pay at least something so that they’re bought in and provide honest feedback. As an entrepreneur in the early days, it’s easy to get caught up in fundraising and selling a vision. But the first huge milestone is signing up 10 unaffiliated customers who love the product. It sounds simple, but it’s incredibly difficult.
David Cummings on Startups 