Business to Business (B2B) startups can have an easier time getting funded than other types of businesses, most notably Business to Consumer (B2C) ones. This is for the simple reason that B2B sales end up coming down to something easy to put on a PowerPoint – an ROI. This isn’t always true, because many web based B2C companies can be started with very little capital, but it’s a gross generalization I’m going to run with for now, please just bear with me.
Business Models and Business Mirages
Any good business has a very clear concept of how it makes money. Startups, internet bubbles excluded, have to articulate this to their investors from the very beginning. For a lot of businesses, especially B2B businesses, this tends to look something like:
“If we spend $X getting everything setup, we can make $Y of profit per customer, and after Z customers we’ll break even. Everything after that is pure gravy!”
This is shortly followed up by the “hockey stick chart” – the one showing profits hitting record levels in year 5 – then comes a really critical moment.
The investors, during Q&A ask about who your most likely initial customers are.
In real life, business deals are done or undone in just a few key moments. This is a key moment - and there is a right answer! We’ll get back to that at the end of this post. First I’m going to discuss the purpose and context of the question.
With this question the investor is going to determine whether or not they believe you can get this thing off the ground. In OEM or B2B businesses, the first five customers are much harder to get than the next twenty. This is because your business has no track record. Your number one objection during sales will be:
“So maybe your solution is better than your competitor – but how do I know you aren’t going out of business in 6 months or a year? What can you offer me that it’s worth putting my reputation and my company’s reputation on the line for that kind of risk?”
When the VC or angel investor asks you this question, they know that this will be your primary hurdle to overcome – and they want to know how you’re going to address it. If you don’t have a compelling way to overcome this objection – your business model is a fantasy. It’s a mirage – because you’ll never get the momentum going to build your sales funnel, let alone fulfill your financial forecasts, without that track record of successes behind you. It doesn’t matter how good a solution you have – customers just won’t take a chance on you if it means they could damage their reputation doing it.
Bad Initial CustomersIn my opinion, most people don’t think this through very well for large deal, B2B, or OEM type businesses. When they take their entire potential customer list – they start to prioritize them by how much value their solution delivers to each one. The companies that benefit the most – they’re the best prospects, right? No.
I’m going to illustrate why next – but you should really absorb this point to make sure you’re not doing it with your own customer list.
The problem with this line of reasoning is that most often, the companies that benefit the most will be ones that have the largest scale themselves. You can see how ridiculous it is in the following example: Let’s say your startup has a new process of creating paper using some better/faster/stronger method. If you can save the corner store 10% on paper, it’s nice, but not that much money. If you can save Ford 10% on paper, that’s real money.
But Ford won’t talk to you!
They’ve never heard of you, they don’t know who you are, and they certainly aren’t going to hand over their entire paper order to you when you tell them you can save them 10% on paper.
Great Initial Customers
Is the corner store the right answer? Yes, and No.
They’re going to talk to you, and you might be able to flirt with the manager long enough to talk them into ordering from you – so that’s definitely a start. The problem is that it’s not super lucrative you’re your startup needs to gain avid customers that are great references.
Imagine instead a delivery service company who takes office-supply orders from all businesses within an office complex. They then source the materials, deliver, and stock them for each company every month. If you approached this company you have a much better opportunity. You could offer them paper at 10% cheaper, which they could drop straight to their bottom line, and their customers won’t care that they switched suppliers. What’s more important, let’s say you can’t fulfill their order the following week – what’s their course of action? They can go back to the traditional office wholesalers and return to their previous margins. Their downside is dramatically reduced.
This company will take a chance on you, because they have no downside, and a pretty solid potential upside. It’s the perfect initial customer fit!
The best customers are the ones that don’t have much to lose if you fail them in some critical way, but have a lot to gain if you deliver on your promises.
The Right Answer
Back to the VC/Angel pitch. What’s the right answer to the original question? Take the investor through your logic of why you think the list of 10 customers you’ve got are least likely to object, but most likely to become great reference accounts to branch out from. Ideally, you’d also have spoken with them directly. You should try to get a personal contact or friend of a friend inside that company in a relevant position to further secure the likelihood of a deal going through.
If you can answer this question to the investor, they’ll feel much more confident that you can build sales momentum. It makes a world of difference to them, and it will make a world of difference to your business too!
About Chris Harris
For 13 years Chris Harris has been successfully developing technology solutions and creating winning business strategies for both start-up and brand-name companies. Chris co-founded
Inventure Global, a San Diego headquartered IT consulting firm with offices and programmers in India offering sophisticated IT and technology planning, design, and implementation services for new and growing businesses looking for experienced talent and intelligent support. Inventure Global also maintains the
New Venture Outsourcing Blog.