David Cummings on Startups

Go Get Five Customers and Let’s Talk Again

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David Cummings

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For idea stage or prototype stage startups, there’s a response that’s becoming more common when pitching angel investors:

Go get five paying customers that love what you’re doing and then let’s talk again.

It’s not that angel investors don’t want to help — they do. There are several reasons why this response is more prevalent:

  • Angel investors want to mitigate risk, and signing five paying customers is great progress for the startup towards proving product/market fit
  • An important test for entrepreneurs is ability to follow through and meet a goal, so this is a straightforward assignment
  • The cost of building a product has gone down significantly such that entrepreneurs should be able to scrape together friends and family money together to get a prototype built and sign early customers before raising professional angel money

Investor dollars are scarce and entrepreneur talent is strong resulting in angels requiring more startup progress before investing. Entrepreneurs should be ready for the response to go get five paying customers.

What else? What are your thoughts on angel investors requesting entrepreneurs sign five paying customers as a pre-requisite for digging deeper into the investment opportunity?

Comments

3 responses to “Go Get Five Customers and Let’s Talk Again”

  1. Paul Nichols Avatar
    Paul Nichols

    Angels certainly have the right (and it’s arguably prudent) to make this type of demand of entrepreneurs. However, the “safety” demanded of an investment opportunity is inversely proportional to the potential return that should be expected.

    My oversimplified classification of investors:

    The Napkin Investor:
    An increasingly rare breed, these visionaries have the power to recognize the potential of ideas in their raw, most basic form. They deserve great reward for being able to make dreams and visions a reality without having to see it to believe it. While execution remains the key to success, these investors realize that they have the resources and know-how to help with execution even if the team is currently lacking.

    The Traction Investor:
    These investors need to see, at minimum, a proof-of-concept in order for their attention to be captured. This is because they’re actually investing in an ability to execute. Ideas are essentially meaningless, but they’re interested in being a catalyst for ideas that are already working. While these folks shouldn’t expect the same return as a visionary, it’s a great way to get a reasonable return with a severely hedged risk. The 5 customer rule of thumb could be great for this type of investor.

    The Revenue Investor:
    This all-to-common type of investor is just a banker. Ideas and team have already been proven… the projected trajectory of numbers is all that remains. These folks are late to the game and as such should expect a minuscule return when compared to visionaries.

    So, yes… by all means 5 customers… 50 customers… it’s all fair territory. But there’s always a trade off. Expect a smaller upside for the more safety demanded.

    Reply
  2. brandtpage Avatar
    brandtpage

    This is the perfect question to be asked. I am a huge believer of the “Nail it, then scale it” model. And the only way to know if you’re nailing it is by having paying customers. Surveys of people who might be interested, is not good enough. Market research is not good enough. Only paying customers can prove that you are potentially on track.

    When I started http://launchleads.com 4.5 years ago in my living room, I was able to get a few paying customers, but only to find out my initial business model was wrong, we went on to pivot 3 times before we found the right model for profitability and scalability.

    Now, we have still been able to bootstrap because we have paying customers on our profitable business model, so we can scale, even without investment dollars.

    Now we just need to determine if putting more fuel on the fire (investment) is what we want/need. But at least we are in a position to not “have” to look for investors because we can grow on our own.

    Thanks David for your posts, you hit the target of what entrepreneurs need to know.

    Reply
  3. Celest Avatar
    Celest

    @Dave, I actually went to LaunchPad2X and learned that my company was not one of the “favored” therefore our last day I was put in the OTHER pitch room without any investors or anyone who would or could make an improvement to my pitch (which was not about money). I learned from that point onward a very valuable lesson. The Heck with any investor angel or otherwise, put your feet to the street and make sales. So, aggressively in December 2012, I planned it out, carried it though and now have 14 sales people, 1 National manger and a President to handle the day to day. We have over 1000 paying customers not just 5. Who cares about investors? I don’t anymore and neither should any entrepreneur. Don’t do 5 do 5000!
    Celest, CEO FreeBirthdayStuff.com

    Reply

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