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When Revenue Isn’t The Answer

RRE Blog

When Revenue Isn’t The Answer

Raju Rishi

So you’re an enterprise startup. You have a solid founding team, you’ve raised a Seed Round to tackle a particular problem in your target market, and you’ve built and launched an MVP. Everyone said you need at least a million dollars of ARR and a dozen customers to raise a bona fide Series A, so you’ve chased the dollar and you’ve gotten there.

But one thing went wrong. You became so focused on closing deals and winning customers that you missed finding real product/ market fit. Only after you raised your Series A did you realize that velocity does not equal repeatability when it comes to enterprise sales, and that the latter means far more than the former. Suddenly you’re not scaling as fast as you’d expected and modeled. Welcome to the world of a bridge round.

How and why does this happen? And how can you avoid it? Let’s go back. An enterprise startup raises a Seed Round, develops a product, and introduces an MVP into the market. The next step is to see if anyone will buy the product, so the team focuses on getting pilots and deals in place and — hopefully — signing up one or two big customers. It works, and suddenly the company can boast modest recurring revenue.

Even for seasoned entrepreneurs, this initial taste of success can be intoxicating. The product works, and a few clients are signed up. Money — for the first time — is flowing in and not just out, and a decent sales pipeline seems ample evidence of product/market fit. That’s the good news. At the same time, you begin to feel the weight of competition both real and imagined. Existing investors are pressuring you to think about the next round. Now, you’re sure, is the moment to move swiftly forward.

But here’s the catch: Closed deals and sales velocity are not exclusive measures of product/ market fit. Maybe, among your first customers, there are wide variations in the core use cases for the product. Maybe your team is struggling with lengthy sales cycles. Maybe you find yourself significantly altering your pitch for different target customers and creating multiple marketing messages along the way.

While these can be typical growing pains for many young companies, they are also indicators which — if occurring consistently — might foreshadow difficulties for enterprise startups. The simple fact is that product/ market fit is not always obvious. And just because you’ve closed deals doesn’t mean you’ve found it.

How do you know if you’ve achieved real, meaningful, and differentiated product/ market fit? Here are a few key questions to test your thesis:

1. Do you know, at a granular level, which potential customers you should target?

2. Who are the influencers? Who are the buyers? Where does their budget come from?

3. What marketing channels should you use to target those customers?

4. Do you have a simple and — most importantly — single marketing message?

5. Do you know what your sales process is, and is it an easy process?

6. Do you have a clearly defined product roadmap that’s aligned to your target market?

7. Can you hire junior sales reps, ramp them quickly, and have them close deals with consistent results?

Product/ market fit is ultimately about repeatability. If you understand who your customers are, what causes them to buy your product, and how to make your solution their number one priority, then you’ve found product/ market fit. But if you haven’t, you need to make some hard choices and keep searching. While it can be deflating to give up revenue or a Series A check, attempting to scale in the absence of product/ market fit can — and often does — debilitate promising companies.

It’s a cruel irony that while early customers and revenue often feel like the lifeblood of your business, these things might actually be killing you. It’s not ultimately about selling to customers; it’s about fundamentally understanding what core functionality causes customers to buy. Allowing a few early customers to determine the trajectory of your business or product offering in exchange for a quick buck is a Faustian bargain, and the devil always collects.

Too frequently, entrepreneurs and investors alike believe that the goal of a Seed Round is to get a startup to the Series A. It’s not. Seed Rounds are the only time in the lifecycle of a startup where you are allowed, expected, even encouraged to test your product in search of real product/ market fit. That’s the ultimate goal of a Seed Round, and a hallmark of great teams is the discipline to move deliberately in the face of distracting opportunity.

Achieving product/ market fit is the transformative moment in the life of a startup. It is the moment of metamorphosis, where a company aligns messaging, marketing, target customers, sales methodology, product roadmap, and operating metrics. This moment cannot be bypassed, faked, overlooked, or ignored. So be disciplined. Slow down. Don’t get caught up in the expectations of customers, investors, or yourselves. For in the absence of product market fit, more money will yield nothing but more problems.