At what point should a startup land that first customer?
With about half of the companies I’ve started, I’ve had at least one paying customer on board before the incorporation paperwork was filed.
This happens when I’m already familiar with the customer and I’m already solving a problem they have. If the problem is universal and the solution is robust, then I form the company around the solution.
This is an ideal startup scenario. If the initial client is already there, additional customers can be identified based on the template of the existing customer. Furthermore, the sales pitch gets much easier, as there is now a real-world example to point to.
But this is usually a process reserved for service startups or low-margin product startups.
At my product-based startup, Automated Insights, we create human-sounding narrative content from big data, something that can’t be done quickly, and we had zero customers at the beginning.
At first, it was difficult for potential customers to wrap their brains around the automated content idea. It hadn’t been done before, and we had nothing to point to other than mockups.
In September 2012, after a few minor customer wins, we launched our product with Yahoo Fantasy Football. Our technology wrote millions of fantasy matchup recaps, all in the span of about two hours, every week of the NFL season.
We no longer had to explain what we did and potential customers’ concerns vanished.
But companies such as Automated Insights can only get from zero to first customer with venture capitalist backing.
“You definitely need a customer signed up before you solidify exactly what you’re building,” said Drew Schiller, co-founder and chief technology officer of Validic, a Durham company that creates health data applications. “Ideally, you’ll get a letter of intent before you start building. We raised a good amount of money and signed our first customer contract with little more than screenshots and a PowerPoint deck. Then we ran … to build our product, all while making minor pivots through more customer development.”
And how do you get in front of potential customers without a finished product?
Those customers should probably already be on your radar, and you should be prepared to cut them a deal.
“Early customers matter mostly as validation for other customers,” said Justin Benson, CEO of Spreedly, a Durham-based payment facilitator. “Those first customers should be through professional friends, connections, your previous life. It’s super risky but if you can manage it appropriately, give your service away for free to your first customer for six or 12 months to get them on board.”
There’s a lot of risk in either approach, but, when done right, additional customers and recurring revenue are just a step away.