AGILEVC My idle thoughts on tech startups

February 5, 2014

revenue-streamMost consumer web/mobile companies focus on user growth and usage early in the company’s lifecycle before shifting to monetization.  This is a logical thing to do… when we started LinkedIn, my mentor Reid Hoffman instilled a mantra of Growth –> Usage –> Revenue which still holds for many consumer companies.  This is especially true for those with a media / ad based business model (e.g. Facebook, Twitter, etc), where scale is a necessary condition for even the first dollar of revenue, in addition to maximizing long term enterprise value.

But B2B startups need to take a different tack.  We invest in internet enabled companies at NextView and our portfolio is roughly equally split between consumer and B2B businesses.  Business facing companies typically provide software or an online service for which their customers pay a fee.

Arguably revenue is the best signal of product-market fit for B2B startups.  In the early days of a B2B startup’s product, all of the following will come into play:

  1. If a business customer is willing to pay something for your early product, even nominal or beta pricing, that’s a pretty healthy indicator the product has value in terms of features and functionality.
  2. Potential customers’ willingness to pay will help you segment your target market (by customer size, vertical, geography, etc) more effectively than simply “researching” your market in abstract.
  3. Some potential customers won’t take your product seriously unless you’re charging for it.
  4. You will be benchmarked on revenue and paying customers when you seek Series A funding… conceivably even at seed stage.

The early goal isn’t to maximize near term revenue… it’ll take time to fully understand your market and establish P-M fit, let alone optimizing the sales & marketing engine.  And this is not to say that there’s no place for having an unpaid product.  There’s a myriad of pricing and payment structures for B2B companies – subscription, transaction-based, term/perpetual licenses, OEM/embedded services, etc.  If you’re collaborating very closely with alpha customers, you may give away the product during initial development phases.  And even as they mature B2B companies may offer portions of their software for free either as a basic tier of service, or a free trial period, or lead-gen products that help fill the top of the funnel 

So if you’re in the early innings of building a B2B startup, embrace early revenue rather than putting monetization off until the distant future.  FWIW this largely holds true of commerce and transaction based consumer startups too (think of the beginnings for Uber, Airbnb, et al).

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  • I'm a former Silicon Valley entrepreneur turned East Coast VC. I co-founded NextView Ventures, a seed-stage VC firm based in Boston, in 2010. Read More »

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  • Rob Go
     - 8 hours ago
    The new @Wayfair holiday TV ad (featuring my home). Sneak peak here http://t.co/OmoNrxHy9V
  • Rob Go
     - 1 day ago
    Cool design focused event @bladebos Nov 6. Limited seats available! http://t.co/qHjU4WBeTx
  • Lee Hower
     - 2 days ago
    @vcparty that statement is true. FRC's LP base looks pretty similar to Sequoia's though
  • Lee Hower
     - 2 days ago
    @vcparty agree. some LPs have to bend their model, though best LPs don't care much about concentration - they focus on accessing best funds
  • Lee Hower
     - 2 days ago
    @vcparty thx - would slightly disagree trad'l LPs & smaller funds are misfit… best seed funds have trad'l LP base (albeit concentrated)

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