Pre vs Post Revenue
Why that first step to generating revenue can be physically painful.
Launching a new company involves the excitement of product development, designing a website, and finding the right logo. The next step in the process can be more challenging as it requires talking to people who may not be as excited about your product or service.
One of our criteria for investing is focusing on post-revenue companies but we do advise several pre-revenue ventures. The transition from pre to post revenue tends to be one of the more difficult aspects of launching a new company but there are ways teams can increase the chance of successfully moving into the revenue generation stage.
Planning a new business is exciting and a time when entrepreneurs dream big and cultivate visions of a successful enterprise. We have met several pre-revenue companies with well developed business plans and detailed strategies to address significant market problems. Just a few weeks ago we had a follow-up conversation with a team that is moving toward launching a solution to a large industry problem, but instead of focusing on customer conversations they are redesigning their website for the third time. The founder believes a great website is required to be competitive in the marketplace, but we suspect a greater concern is fear of rejection.
The Pain Is Real
Two stages of launching a business involve development of the idea and then selling the concept into the marketplace. The process of converting an idea into a business plan and organizing a team to launch a new venture is considered the idea stage. Founders tend to get immersed in this phase based on a belief that everything needs to be perfect before their idea can be released to customers. Nobody wants to launch a poorly designed concept, but the team must remain careful to not get caught in a perfection mindset.
The second stage is implementation, which tends to be the more challenging part of a new business as it involves going to market and facing the potential not everyone will embrace the idea or rush to buy the product. Without a defined sales or marketing plan most business plans start to fall apart in this stage. Traditional sales training tends to rely on a rejection theory where rejection becomes part of the sales process and every “no” from a customer implies one step closer to a “yes”.
This traditional sales model does not work for start-ups. The main difference is the person being told “no” is usually the founder who has spent months or years building a product and has a strong emotional connection to the process. Several studies including one in 2003 focused on the mental impact of rejection and another in 2011 studied brain scans to understand what areas are activated when someone encounters rejection.
Results show the areas of the brain associated with verbal rejection are similar to those activated by physical pain. Since company founders are more emotionally invested in their ventures, hearing a ”no” from a potential customer tends to have a greater psychological impact. As the MRI studies show, the “no” for a start-up is more than just a verbal rejection as for some founders the similarities to physical pain may be preventing them or their team from even beginning the sales process.
Overcoming The Pain
Understanding why founders get caught in the planning phase helps advisors design a strategy for guiding companies into the revenue generation stage. Instead of following the traditional method of charging through a wall of rejection or checking off the “no’s”, we found two approaches which are better aligned with the start-up world.
The first method is approaching network connections in the target industry who are unlikely to purchase the product or service. These may be friendly contacts at much larger companies or those who are mandated to only buy from certain vendors. Offer to take them to lunch or coffee in exchange for feedback on the product or idea. Despite knowing the chance of a sale is low, the approach to these meetings should involve the same preparation and intensity as actual client conversations. The goal is obtaining real-time feedback and a deeper understanding of how a product and presentation is perceived. Using this data allows the founder and their teams to mitigate presentation shortfalls and better prepare for actual customer meetings. Hearing objections and constructive feedback from a friendly source also allows the team to adjust the marketing process without risk the responses will derail forward sales momentum.
A second option is approaching clients using a two-step procedure where someone other than the founder handles the initial discussions and brings the team into the conversation at a later time. The process allows a person with less emotional attachment to receive initial feedback and remain open to constructive responses without risking activation of the pain region of the brain. Team members who have the initial conversation may be members of the advisory board making warm introductions from their networks or trusted sales professionals willing to be compensated on a commission basis.
The start-up sales process involves a higher degree of emotional involvement than selling an established product. Both of the approaches we discuss provide options to reduce the emotional impact of an initial sales conversation and prepare a start-up team to move into the revenue generation phase of the business. As brain MRI studies indicate, rejection can mirror physical pain which makes it more important new companies recognize this connection and do not allow it to derail a teams momentum toward initial revenue generation.
Achieving Revenue
The initial stage of launching a company can be exciting as it involves developing a product, creating a website, or finding potential suppliers. New companies may also find themselves spending a considerable amount of time in this first phase making sure everything is perfect before going to market. Research indicates verbal rejection can trigger the same area of the brain responsible for physical pain, so founders and those emotionally tied to a product may subconsciously be prolonging going to market by focusing instead on constant product tweaking.
Recognizing the science behind rejection helps a team implement alternative marketing approaches to build and maintain momentum during initial sales conversations. The start-up sales process is different from those of more established companies as it involves a greater connection between emotions and sales. Once teams recognize and overcome these challenges, companies have a much smoother path toward achieving the first dollar of revenue.