There is a prevailing belief that the magic formula for early-stage tech startups hinges on how quickly they achieve $1 million in annual recurring revenue (ARR). Investors in SaaS companies, in particular, are very guilty of pushing this or its equally loaded corollary, When will you sign your first six-figure deal?
But in the rush toward these numbers, too many startups lose sight of their primary intent: These metrics are supposed to be an indicator of product/market fit. Weve seen companies reach $1 million in ARR in less than a year, yet not have enough market momentum to get their next million easily. Weve seen early-stage companies so concerned about getting those first sales, they dont validate the market and if theyre building the right product. Weve also watched a focus on new logos make companies forget about keeping existing customers happy, introducing unexpectedly high churn something startups cant afford.
Those first customers and that first million are supposed to be the bedrock on which the rest of the business grows. Founders must constantly ask what theyre learning about their market, product and go-to-market approach in that order! so the business becomes a flywheel.
Revenue is a lagging indicator of sales success, so must likewise be prioritized accordingly. Thats not to say revenue isnt vitally important and that there isnt a great deal of urgency to it, but focusing on it too much too early can mask big problems that will hurt startups later when the stakes are higher.
Here are a few lessons weve learned by watching our early-stage companies go through this crucial phase. Every early-stage company needs to do them well.
Customer and market discovery is job No. 1
We talk about product and knowing customers a lot, but that is insufficient. Startups must understand the market, as well. How do customers do this today? Is there urgency around the problem? What is the community saying? An early investor in PagerDuty went onto Reddit and Quora and just looked at who people were talking about. It made his decision easy.
To be really successful, it is as important to understand market dynamics as it is to deliver a great product. This also helps zero in on all the aspects of your ideal customer profile; it needs to be more specific than you think! This also then helps qualify customers for future sales.
Elevate Security stood out in their super-crowded security space because they carved out a unique position around people-powered security. They used their early sales process to carefully qualify who would help them best develop their products. Their first product got shout-outs on social media from users who loved it a rare occurrence in security and were indicators they had found good initial customers and were creating something unique.
Build a product that sells itself
Youll always find smart people saying, I love what youre doing. Some things are so broken even a mediocre improvement is worth a change. But this is why revenue can be a false indicator for scalable success: Founders find enough early adopters to get that first million, which leads them to believe the product is enough. The company starts chasing more revenue, not investing in a product-based growth engine. If sales keeps hitting their numbers, everyone believes things are fine. Until theyre not. And then its usually a really heavy lift, with 6-12 months of product, sales or team upgrades.
What startup doesnt want a growth curve like this? Zoom had triple-digit growth for the last four years in a crowded, mature video conferencing category. Janine Pelosi, Zooms head of marketing, said the reason they were so successful before and after she arrived was they have a great product. Its reliable, easy to use, and the founder,Eric Yuan, was selling it every day. Yuan knew the market really well coming out of Webex, and always touching customers meant he could adjust company strategy accordingly. Zoom embodied the real magic formula: know your market + build great product.
Pay attention to customer engagement and delight
Customer satisfaction is simple: It comes from the perception that people get value from their purchase; its much less about how much they paid. Its also always cheaper to make an existing customer happy than it is to acquire a new one, so make sure even in the early days that youre investing in making current customers happy advocates.
Aquabyte uses computer vision to identify sea lice in the $160 billion aquafarming market. When they showed customers FreckleID (think facial recognition for fish) to uniquely identify fish in a pen of 200,000, fish farmers loved the idea. The price they were willing to pay was 3x what the CEO thought possible. Theyre likewise investing heavily in making sure their initial customer is successful with the product and are delighting them in unexpected ways (handwritten holiday cards). They have more prospects in their pipeline than they have capacity, which means they dont need to expand sales to grow revenue fast.
Your startup may have the coolest tech, be in the biggest market and have the smartest team. No matter what your board says, remember revenue is NOT the primary indicator; it is simply an indicator. To become a breakout success, you need to read the tea leaves of all aspects of your market and build a product and customer experience that is truly superior.