“The biggest mistake that first-time entrepreneurs usually make is that they get so carried away by their idea that they forget they need to build a profitable business from it. Creating a viable company from a concept requires constantly thinking about certain basics: your product’s value, who are the customers, how to make them buy into the concept, what it takes for them to buy the product, and when revenue will exceed the cost,” says Shirish Deodhar, co-founder and CEO of InnovizeTech Software.
He is one of many software startup founders SandHill.com interviewed over the past three years for advice and lessons learned. Most of them mentioned challenges around revenue when we asked what unexpected issues they encountered.
Deodhar’s advice is to initiate sales and marketing efforts relatively early and verify that a few early adopters are willing to use the product with or without some payment. “As you ramp up on sales, keep assessing the sales effort required to the revenue that you are earning from each account and then determine how to improve the ratio.”
Dr. Tal Schwartz, chairman and CEO at ClickTale, recalls they assumed they could scale their inside sales force up handle very large deal prices. He says he didn’t realize it at the time but learned that “when you sell deals north of $100K, you need a lot more face time with the customer.”
Pavan Thatha, CEO and co-founder of ArrayShield, says revenue increases when the startup always thinks from the customer perspective.
Investor funding
“As a startup, it’s essential that you understand how you’re going to fund what you’re building,” says Seymour Duncker, founder and CEO, iCharts. “While you may think that funding should depend on what you’re building and the opportunity you see, the reality is that it depends on the stage of your business. VCs and angel investors are not a continuum and don’t fund in the same way.”
James Liao, CEO, Pica8 suggests startups make sure they have critical mass at each phase of the company — the first core team, then the Round A team, then moving to Round B, and so on. “Each phase has critical skill needs,” he says, “and getting that piece right is a challenge.
Overhead
What about overhead? Obviously it’s wise to keep overhead low until the startup generates revenue. But S. Vijay Venkatesh, co-founder and managing director at Syscon Solutions, says it’s also important to “keep overhead low even when you generate good revenues since you do not know when the next recession will hit you. Always keep your reserve tank full for the next eight to 12 months of fixed expense.”
Recessions
Tough economies and recessions hit several startups we studied. Kreeo’s CEO, Sumeet Anand, bootstrapped his startup. Then the recession hit and funds to scale up efforts were a constant challenge. “Finding good people to work for peanuts and big dreams was tough,” Anand says. “I learned that having enough cash to survive in difficult times is more important than growing.”
Aujas co-founder and CEO Srinivas Rao explains they started operations in April 2008 and gained good traction until the slowdown from the financial crisis started to impact them towards the end of 2008. “We had to figure out how to keep growing and yet conserve cash. We had to make some hard calls then,” he says. “The team rallied around and recognized that we needed to fight through tough times.”
Team matters
Thanks to the Aujas team’s commitment and faith, they were able to scale the business rapidly despite all the hardship of the recession.
But Mark Shirman, president and CEO, RiverMeadow Software, points to a pitfall many startup founders encounter — keeping a friend or co-founder on board longer than they should. “Sometimes you need to be focused on the entire company as a unit, over a particular individual,” he comments.
Anand at Kreeo reminds that change is the norm. His advice for delivering on the vision amidst change is “have a complementary team of at least two founders right from the start. Think about how you will make money while or prior to defining/refining your product.
Advice from Modo Labs founder and CTO, Andrew Yu is to find a partner to help scale and market the business. “Having that relationship makes a difference like night and day. It’s a tremendous boost for startups,” he says.
Modo Labs has a relationship with AT&T and, through it, access to sales reps that have active relationships with thousands of organizations. “Of course it’s not that easy to get such a relationship. But once you get it, it’s a tremendous opportunity,” Yu comments. Revenue increases for entrepreneurs that seek opportunities with a bigger partner as a supporter and a reseller.
Bottom line
When discussing revenue pitfalls, Venkatesh at Syscon Solutions warns startups to “Never rate your company based on its revenues.”
He says the best measurement is employee satisfaction levels. “Only satisfied employees will give services that make satisfied customers, be responsible team players, put the organization’s interests above their own interests and become good future leaders. Remember: for the best results, employees are responsible; for failures, the CEO is responsible.”
Kathleen Goolsby is managing editor of SandHill.com.