There’s a natural way to get started on your amazing business idea: build a prototype. For an idea that is software, of course you’ll build a software prototype. Now, if you’re not someone who can do that yourself, you’ll need someone else to do it, and that usually involves spending some money. And, of course, it makes sense to spend as little money as possible because probably your idea is terrible, like most ideas are, and probably your startup will fail, like most startups do.
So there’s thousands of new prototypes being created out there each year, and then our market-based, capitalist system has a neat way of culling the herd: rewarding the better ideas with a customer. So if you are one of the lucky ones able to find someone to pay you money for your product, you haven’t exactly “made it” yet, but it’s a much better sign than the alternative.
So now you have a real customer paying you real money for your… err… cheap prototype!? Now probably what noone told you about startups is that you are likely stuck with that cheap prototype forever. Or, more accurately, that cheap prototype is going to evolve into an increasingly expensive prototype over time. But don’t worry, you haven’t done anything wrong: it would have been a mistake to have built an expensive prototype before you knew for sure you really had a thing.
So this is how most (I have no evidence for this!) B2B startups get going, because it’s the way that they should get going. What is much less well understood, however, is the consequences of starting in this way, and how you mitigate the impacts of them.
Unless your business is viable with a single customer, you’re probably trying to get a second, and even a third. However, a huge amount of discipline, luck and probably capital will be required for you to be very choosy about who that second customer is. More likely, you’ll welcome whoever you can get, even if they don’t resemble the first customer, and don’t have exactly the same needs of your product as the first customer. So you’re going to stretch your product to include that second customer.
So what does stretch mean in this case? It means the vision for what the product would be, who would buy it, and how it would evolve, has interfaced with the real world. This is undoubtedly a very good thing, however it is not risk-free. Your original vision (hopefully) had an element of scale to it, making your world-beating idea very profitable, or at least viable. Now that you’ve compromised the vision somewhat in order to access some revenue - the revenue you need to keep the company in a continuing state of existence - is it still capable of scale?
But you’ve survived the riskiest period for a startup and come out of it with some customers and some revenue, which puts you in the small minority. What happens next?
If your company has achieved hockey-stick growth and is now a household name, congratulations… but this article is not for you. This is for the very much larger population of software businesses who achieve something of a steady-state - not quite going out of business, but not really growing, either.
There are plenty of companies out there who have sustained this state of affairs - teetering on the edge of collapse - for decades, and it’s not wrong or bad that they have. But it probably wasn’t what the founders originally had in mind, and many more such companies have gone out of business in their first five years. Running out of capital - i.e. not making enough revenue to sustain the cost of supporting the customers - is the #1 reason startups fail. However, many leaders become aware of their situation and try to find a way to unlock higher growth.
The transition is not straightforward. I will save the long version for another article, but the short version is that your company is “sales-led” and you’d like it to become “product-led”. This shorthand conceals a whole raft of nuance, but what it boils down to is that you have a low-growth culture that is now calcified, and you’ll need to somehow root that out, and replace it with a substantially differently-oriented culture. I’m trying to make that sound hard, because it absolutely is, and everyone else seems to try to make it sound simple!
And beyond the culture, you now have a set of legacy assets you are lugging around, that you didn’t have at the beginning:
Your B2B startup is doomed from the start, and how could you conclude otherwise? Even if it manages to make it through the first couple of years, then every year it evades failure it accumulates more weight, eating away at the remaining chance it will ever achieve escape velocity. But surely some B2B companies manage to become successful. Yes, of course that’s true. And some of them have even successfully transitioned from sales-led to product-led cultures and achieved hyper-growth. But I would argue that these companies generally fell into a positive market trend that meant they were successful despite their failings, and that these trends were largely visible only in retrospect. So, any rational person reading this would never try to start a B2B business.
But you’re not a rational person. You’re an entrepreneur. Good luck 🙂
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