By Itay Sagie
Congratulations, you have initial customers and you got funded by a VC. You have now climbed on a rollercoaster that is gunning forward at a speed of around $300K per month, with tracks that are not yet fully laid out.
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The tracks will run out in approximately 12-24 months, which is usually not long enough to become financially sustainable.
With a limited ability to extend this period, all you can do is raise more money or generate more revenue. Which brings us to Focus No. 1.
Focus No. 1: Revenue over funding
These days, VCs are becoming more conservative, and look to invest in post-revenue, ARR-driven, profit-seeking startups. If you are pondering if you should prioritize a sales call or a VC call, prioritize the sales call. If you look at EV/sales ratio in SaaS tech startups, the average is around eight, so a single dollar in sales is worth up to $8 in your company’s valuation.
OK, you agree, and are looking to focus on revenue. How do you go about it? Focus on a good farming strategy monetizing your internal customers or on new user acquisition?
Focus No. 2: Monetization over customer acquisition
Should you prioritize a $5,000 marketing campaign? Or a $5,000 internal effort to better monetize your existing customers? While many choose the former, the latter will have a bigger impact on your growth.
Monetizing your existing customers, and keeping them happy and paying, is far more important than reaching out to new customers, if they too will end up paying very little and churning fast. Fixing your monetization and retention rates should be prioritized over user acquisition.
After you know you have a reliable product, a high retention rate and a clear growing willingness to pay, start focusing more on new user acquisition. This is equivalent to fixing a broken engine: only after you’ve done that do you go out and buy fuel.
OK, so you’ve monetized first, but you just got this amazing inbound interest from a customer with a use case you never thought about that is willing to pay now!
Focus No. 3: Large market over niche use cases
This brings us to the third focus area.
The VC math is pretty simple: In an ideal scenario, if you get $20 million in venture funding, the investor expects to receive 10x back, meaning $200 million. As these investors own about 20 to 30 percent of the company, they expect a valuation of $600 million or $1 billion. Because revenue multiples (EV/sales ratio) are around eight, that means you should reach revenue of at least $75 million. This will only be possible if you are targeting huge markets with high growth potentials.
While it seems obvious to focus on high-growth opportunities, I still see companies focusing on niche use cases, just because they were presented to the company and quick revenue seemed too enticing to refuse. However, once you go down this path, your website, your company presentations, and before long, your investor decks will be filled with information on this niche use case, as it is your main or only source of revenue.
As this will not bring you close anytime soon to the revenue or valuation that venture investors are after, it will end up hurting both your fundraising efforts and commercial success.
While I realize it is easy for me to sit in my quiet office and write what you should do in an ideal world, my goal is only to share from my personal experience, seeing both the bad examples of what happens when you lack focus, and the huge success of companies that focus on what actually matters.
As an entrepreneur, I know that if you lack strategic focus now, it will only fuel your motivation to pivot your strategy and succeed no matter what.
Itay Sagie, a guest contributor to Crunchbase News, is a lecturer and strategic adviser to startups and investors. Sagie is also the Israeli adviser at Allied Advisers, a boutique investment bank from Silicon Valley. And founder at VCforU.com. You can connect with him on LinkedIn and follow him on Twitter at @itaysagie.
Illustration: Li-Anne Dias.
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