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).

  • James Ferguson @kWIQly

    Simple, concise, and obviously correct.

    We are (it seems) just days (after five years bootstrapping) from first B2B sales with our new product, and 90% of the pre-revenue lead time from conception to readiness has revolved around ” Yes it’s interesting (a near universal response) – but what will they actually pay for ? “. We are now regularly asked pricing questions at first direct sales meetings so believe it is only a matter of time.

    The biggest “learnings” for us were:
    1) You don’t have to sell genius – improvements and big productivity gains are just fine.
    2) Support, complement or substitute an existing business process cleanly.

    Why? – because taking a start-up on is a big enough perceived risk, without simultaneously modifying B2B business models.

    • leehower

      Thanks. Your point #2 is a great one… in fact most B2B startups have to do all three. Even when substituting an existing business process or piece of software, you still typically have to support and complement other processes or software in the org.

      • James Ferguson @kWIQly

        Good point – I guess a business model has parts like a jigsaw.
        You can improve how one bit looks – support
        Consolidate the environment – complement
        Or swap a part out – replace,
        - but in each case the boundary of those shapes needs to be respected or stay intact or you are creating new problems while solving others.

  • Javier Cambon Sanjurjo

    I completely agree with you Lee! We have been struggling with this decision for a while, and decided to follow what you are talking about here, for pretty much the same as the 1/3/4 reasons you are listing.

    As Paul Graham says, you want to build a product that solves a big need for a few, not a small need for many. Building a vitamin rather than a pain killer has been a concern for us since the very beginning.

    Another thing we have realized is that users care much more about the product & service when they are paying. This is great because you will learn faster about the key features they want to see next. Of course, they will also complain more if things don’t work well :-)

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