Early customer acquisition may not be as valuable a metric as most investors and entrepreneurs think
Investors have learning curves. By that I mean most of them don’t just magically pick winners the first time they write a check. Instead, many of their earliest investments don’t pan out, and, like entrepreneurs, they use what they learn from failure to improve their strategies and try again.
As you might imagine, it can be a costly learning process. I witnessed it firsthand during a lunch with a friend who’d made lots of money selling real estate and had recently begun angel investing in tech companies. Earlier that morning, he’d just gotten final confirmation that the first startup he invested in was shutting down.
“That was an expensive lesson,” he said as he shared the news. “It cost me $100,000!”
“That is expensive,” I agreed. “What was the lesson? What’d you learn?”
“I’m honestly not sure,” he complained. “I was certain I’d found a winner. I took my time to make sure I’d found the right company and a great deal. The product seemed solid, the founders were real grinders, and they’d proven product-market fit. What more could I have asked for?”
The truth is, he should have asked for a lot more because product-market fit isn’t something early startups can easily prove.
The problem with proving product-market fit
As soon as my friend said “product-market fit,” I had a pretty good guess as to what had gone wrong. Product-market fit is one of those phrases in the startup world entrepreneurs love to throw around because it seems like it means something important. And, to be fair, maybe it does mean something important, but it’s also a very hard thing to prove in the moment. It’s much easier to prove in retrospect.
Because product-market fit is hard to recognize when it’s first happening, entrepreneurs can claim to have found it, and there’s not much accountability for being wrong. After all, what is an investor going to do if a founder claims to have found product-market fit and the company ultimately fails? It’s not like an investor can easily take someone to court for being wrong about a squishy entrepreneurial concept with no clear-cut definition.
“How do you know they’d found product-market fit?” I asked my investor friend.
“They had their first 100 customers,” he said. “It’s the thing everyone always talks about as being important for startups measuring startups. There’s a gazillion articles about finding your first 100 customers online, and they all say startups aren’t legit until they’ve got 100 customers or some bullshit like that.”
The “bullshit” to which he was referring is a popular piece of startup “wisdom” that tells entrepreneurs they need to focus all their early efforts on getting their first 100 customers. Or 10 customers. Or 1,000 customers. I suppose the exact number depends on the type of business, but the gist is the same: “You don’t have a real business until you have some reasonable critical mass of people paying for it.”
In general, a startup’s current customer count is a reasonable proxy for measuring the startup’s progress. However, what my investor friend didn’t appreciate was that having an initial batch of customers doesn’t prove product-market fit. He needed another critical piece of information.
What matters more than number of customers?
“How did they get those first 100 customers?” I asked my friend.
“I don’t know,” he shrugged. “I told you… the founders are real grinders. I’m sure they just dug in and did whatever they had to do to make a sale. It’s a big part of why I was sure they were gonna make it.”
“That’s the problem,” I explained. “Being a grinder isn’t scalable. Maybe it gets you to 100 customers. Maybe it gets you to 1,000 customers. But it doesn’t get you 10,000 or 100,000 or a million customers. At some point, you have to stop grinding and start executing a repeatable, scalable business process. Grinders aren’t always good at doing that.”
“Why not?” my friend asked.
“Because repeatable, scalable processes require organization, building teams, and managing employees.” I told him. “It requires teaching other people how to do something instead of doing it yourself, and that’s a skill grinders aren’t usually good at. And somewhat ironically, they’re not good at it precisely because they’re so good at making things happen on their own.”
“I hadn’t really considered that,” he replied. “But I guess it makes sense. So tell me this… how many customers should a startup have before I consider investing?”
“You’re asking the wrong question,” I told him. “Don’t invest because a startup has an arbitrary number of customers. You need to invest in a process. If the startup has customers, do they have a proven, replicable process for getting them? If they don’t have customers — or only a small handful — what are the founders working on? Are they focused on grinding out new customers? Or are they trying to create a system?
“The point is,” I continued, “in the early days of a startup, process is more important than progress because, as you’ve just learned, early progress is easy to manipulate.”
Why founders should focus on process
Even though I was giving my advice to an investor, it’s equally important advice for entrepreneurs. After all, I’m sure the founders who convinced my friend to invest weren’t trying to trick him. They believed their initial 100 customers meant something.
And, to be fair, I suppose it did mean something. Specifically, it meant they were good at grinding their way to closing a few successful deals. However, since they way they were getting those deals wasn’t scalable, they weren’t able to keep growing and, ultimately, their startup failed.
To avoid the same fate, ask yourself one simple question: Can you train someone else to take over your startup’s customer acquisition process in a day. If you can train someone else to do what you’re currently doing to get customers in less than a day, you’ve got yourself something valuable. If not, you’re getting your customers by grinding. Stop what you’re doing and focus on turning your customer acquisition strategy into a repeatable, scalable process.