How Startups Measure Success Before They Generate Revenue

By: Joe Procopio

Let’s talk about whether or not you can determine a startup will be a success before it actually brings in any money. Because while there’s no good way to do that, there are some cheats.

First, let’s make sure we establish this fact: The only accurate way to measure the success of a startup is by using revenue as the basis of the measurement. In over 20 years of building and working with startups, I’ve learned that while revenue is not a predictor of success, it is the first objective marker. Until money comes into the picture, there’s no way to know which direction the business is ultimately going to go. Period.

Now, no one generates revenue on day one, at least not in a way that isn’t fluky or sketchy. Success takes time. And no one wants to waste their time on an idea that isn’t showing signs of being successful. Investors will all agree, I can assure you.

So while your startup has to get to revenue quickly, there are indeed a few signs that may mean you’re on the right track. Here’s how you read those signs correctly, along with some additional validation I like to see.

Audience Engagement

Before your startup has paying customers, it will have an audience. It could be a free-tier of customers, or it could be a collection of fans and followers. An audience is just the grand sampling of people who will become your customers once they discover your product, fall in love with it, and hand you money for it.

The sign that matters isn’t how large an audience you have, but how engaged they are. What you need to know is how many of them are using the product, how often, and for how long. If possible, you also want to communicate with them to know exactly how happy are they are with it, but more importantly, whether or not they can live without it.

That’s engagement. It’s hard to measure and easy to mistake. To illustrate how commonplace it is to misread this sign, I’ll relay a story from a founder of a B2B software company I know. Let’s call her Amy.

“I initially fell into the trap of getting as many betas confirmed as I could, but they were not using the product consistently. I had the wrong initial market, and instead of giving good signals to investors, they were bad signals.”

“Then we picked another market and started doing pilots with a path to conversion, giving them just two free months of the product with the opportunity to be an early adopter. Now we have weekly meetings with the pilots and track their usage. Our goal is that they use us at least once per week at the beginning, then almost daily after that. The ultimate metric will be the conversion of these pilots to paid customers.”

How I’d Validate: If I’m starting with a free-tier audience and tracking their usage and getting feedback, the validation I look for is when they start reaching out to me. It doesn’t matter if they’re asking for features I’ve promised, asking for other features they’d like, or even complaining about what’s missing or what’s not working.

If they’re taking time to contact me, they’re engaged. If no one is reaching out to me, there’s no metric.

Conversion

The strategy I use most often is to start with paying customers, and create my audience out of the ones that don’t want to pay. What that means is I end up working with much smaller numbers, which seems like it would take longer to get to growth, but it’s actually easier because conversion is the hardest step to perfect in the customer acquisition process.

No “hockey-stick” type growth chart starts with a lot of customers. Those charts all start with one customer, then a few, then a bunch. To get that jolt up and to the right, you have to perfect the conversion process. And once you learn how to convert a handful, you can repeat and do it over and over, with less noise to send you chasing false positives.

So how do you get that first handful of paying customers to start giving you signs of success?

Founders are usually shocked when I tell them they don’t have to offer full price out the gate. Look, it’s startup, this is new stuff, there aren’t any rules until you make them.

Usually the biggest hurdle in converting customers is the product learning curve. And usually the best way to learn the product is to use the product. This is how free tiers happen. But if we use penetration pricing instead, we eliminate a lot of the noise that happens in a free tier.

Penetration pricing means charging something, anything for the product for a trial period. Like right now I’m paying $1 a month for Hulu. That’s nuts, but if I decide I can’t live without Hulu, they’ve got me.

How I’d Validate: My founder friend Amy ended her quote above by stating her next goal was to convert her pilot audience to paying customers. Ideally, she wants to do this in two months. In return, she’ll offer them preferential pricing or treatment as early adopters, thus sweetening the deal.

Of course, Amy will convert some of these customers. But the question Amy needs to ask is not how many customers she can convert — she already played that game when she learned she was targeting the wrong market. To read the right signs of success, Amy needs to measure how quickly can she convert them and how much she has to offer to get them over.

Outside Investment

I’m a big believer in revenue before investment, and that means two things:

  1. I’d rather fund a startup with customers than with investors, if I can.
  2. It’s very, very hard to land outside investment. It’s much harder if you don’t have revenue.

If you do happen to be attracting outside investment, and by “attracting,” I mean checkbooks are out and term sheets have been discussed, this could mean a couple of things:

  1. Your idea is being validated using the best non-revenue measurement possible. People usually don’t write checks unless they mean it.
  2. You’ve done this before and they’re betting on you, not your idea.
  3. You’ve got a very investable idea. But note that this is no way automatically translates to an investable company.
  4. You’ve found a sucker.

How I’d Validate: The very few times I’ve been offered outside investment pre-revenue, I’ve not taken it, mostly due to reason #2 above, and I had issues with my own idea. But here are some steps I’ve taken to justify an investor’s confidence in my idea:

  1. Form a small syndicate. At pre-revenue there’s no harm in seeking multiple investors to validate each other. If you can attract one investor, you might just be lucky. If you can attract five investors, you might just be onto something.
  2. Refuse the investment and give them every single reason why they shouldn’t invest in your company. If they come back, they understand caveat emptor.
  3. Tell them to hold off until you can get to revenue. This will be good for both you and them.

In the end, no one gets a pass on revenue. Even the best repeat entrepreneurs hear the clock ticking the moment they take investment or invest in themselves. The key is to get to those pre-revenue signs early, and take them for what they are. Then go build that revenue-generating machine that you and everyone else believes in.

Are You Ready To Lead Your Startup Through the Growth Stage?

By: Joe Procopio

Most of us entrepreneurs chase success like a dog chases a car — we don’t know what to do with it when we catch it. That’s because most of us have at least one weakness in our growth game. And that’s because we don’t get a ton of opportunity to practice. And that’s because if we mess up it can be game over.

That can all be fixed.

There are no guarantees in startup, but we can improve our chances for success by breaking down the growth game into five parts, each of those requiring a slightly different plan of attack but all of which are rooted in the skills that got us here in the first place.

The Growth Stage Means New Problems

I’ve been through the growth stage more than a dozen times. I’ve learned that success in startup is a moving target. It shifts while we chase it and then the bar gets raised as soon as we reach it. There really isn’t an endgame, outside of an exit — and that’s only the end if we walk.

In other words, we never leave the growth stage, we just move the goalposts.

The growth stage starts with an extraordinary win, some kind of event that meets or surpasses where we had planned for our company to be in terms of its lifecycle. This can be landing outside funding, it can be a deal with a major partner or customer, or it can be an market land grab — that’s when our product launch performs way past our expectations.

Once we hit the growth stage, everything changes, in good ways and bad ways, whether we want it to or not. There’s no roadmap to scale our product or grow our company. But there are strategies at each part of the growth stage that we can practice and master, ultimately gaining confidence in the decisions we make.

If we do that, we’ll eventually be driving the growth stage, instead of it driving us.

Part 1: Launch — Focus on managing chaos

There’s a reason why the primary metaphor for the growth stage is a rocket. Like a rocket launch, there’s a boatload of planning and preparation, sometimes years in the making, that goes into a new company or a new product, all of it coming to fruition in one short moment when we put the rocket in the air.

At that point, we lose almost all control over arc, velocity, and direction. Whatever we programmed the thing to do, well, we just hope we were right. Or close.

We actually do have quite a few things working in our favor this early.

For one, we have plenty of time to recover if our trajectory was off. So don’t be afraid to make mistakes.

Also, the brute force of the blast is more of a requirement than finesse, meaning control isn’t a huge requirement yet. So be bold and worry about control later.

And finally, a launch usually comes with support, maybe from the VC that led our round, or maybe from a champion within the large customer we just sold. Don’t be shy, make sure you lean on that.

The secret to a successful launch is not to blast it as far as we can, but to set ourselves up for the next stage.

Part 2: Momentum — Pull signal from the noise

A launch is just a noisy and public proof of concept. Just because we got the rocket into the air doesn’t mean it’ll stay there. We need to get it into orbit, and for that, we need momentum.

There will be a ton of noise from a launch.

Externally, we’ll see a lot of false positives and probably some very compelling wild goose chases. Customers will buy our product, but that doesn’t mean that they’ll buy it again or that more customers will buy our product.

Internally, everyone will get freaked out. In efforts to sustain new growth, there will be overspending, second-guessing, forced formality, and an uptick in complaining. I’ve never seen a launch where all of those things, and more, didn’t immediately follow.

This is the time to take very measured chances, make very recoverable mistakes, and make very serious decisions on course correction.

I recommend establishing a product team, dedicated to pulling signal from noise. This will be a benefit externally, where we’ve now established an independent entity that can act in the best interest of product success. It’ll also help internally, taking some of the growth responsibility off of the rest of the org and centralizing it in one place.

Part 3: Narrowing — Focus on big decision making

Once we achieve momentum, we have the luxury of becoming proactive about what it is we’re building instead of being reactive all the time. This is the part of the growth phase where some big, risky decisions need to be made.

We’re narrowing the scope of our company by defining our attack on markets and refining the options of our product.

We may decide to broaden our market approach, or narrow it, or pivot and chase an entirely new market altogether. As we make those decisions, we’re also settling on the evolution path of our product. We’re looking at maximizing margins while increasing usage — difficult to do at the same time.

We’re going to be making a lot of decisions without a lot of data, and making a lot of assumptions about risk vs. reward:

  • Do we trust that the market conditions are right to take some big and bold steps?
  • Do we go after a particular set of desirable customers at the risk that they may dictate the future of our product and even our company?
  • Do we start chasing our B-story now: The risky path that’s going to lead to bigger growth and insane valuations?
  • Do we back off and raise (more) money in hopes of gaining a stronger foothold to attack a larger portion of the market?

To make these important decisions, we’re going to need some help.

I’d recommend tightening the executive process here, making a formal distinction as to who on the team should be giving input and calling the shots on the future of the company, and who shouldn’t.

I’d also formalize and start leaning on an advisory board and a board of directors. If we’ve chosen the right people, they’ll have enough experience in their rearview to guide us through the ramifications of each decision.

Part 4: Targeting — Construct Your Best Pitch

Targeting is where we know what we are, we can see the goal, and we’re making small moves that have enormous implications. Back at launch, all we needed was a big blast that wasn’t a disaster. Here, it’s all about accuracy.

When you see those startup companies that look great on paper, raise big money at massive valuations, maybe even become a part of the culture, and then stall and fall off and eventually shutter, it’s because they couldn’t manage targeting.

At this point, our pitch should be perfected, our market should be established, and our product should be robust. We’ll begin accelerating hard towards our eventual goal — could be market domination, could be acquisition, could just be a secondary offering.

I’d recommend creating relationships with any org that could buy us, invest in us, or with whom a partnership could potentially increase our size by at least 50%. At the very least, we just want to make sure we’re on their radar if we’re not already. That said, there should already be some inbound interest as well. Pay close attention to this inbound, as it will give us an idea of exactly where our value lies for the next step.

Part 5: Exit — Focus on negotiation

The closer we get to the goal line, the harder it is to cross it. The best entrepreneurs are the best at negotiating the endgame.

The good news is that by this time, we’ve had plenty of practice at negotiation with orgs large and small. We’ve probably lost a few deals and also landed a few that we didn’t deserve. All that practice comes into play now.

I’d recommend always starting high and negotiating down, and not just in terms of money, but also in terms of what we saw as the eventual purpose and outcome of the company we’ve spent so much time building.

It doesn’t matter if it’s an acquirer, a partner, a customer, an investor — we’ll want to make sure we get the best terms on the deal we’re making, because we’re likely not going to get a second chance at negotiating.

And Then Let’s Play Again

My first time through as a sole-founder entrepreneur was after having been through several growth stages as an employee and as an executive. Even then, I got through most of the later parts of growth stage with a lot of pluck and a little help.

But I’m going through a growth stage right now, and these days I’m pretty confident about every part of the process. It took time and practice, and once I started breaking the growth stage down and focusing on the specific demands at each part, everything got easier.

Seven Questions with Jack Dorsey

MEET JACK

Jack Dorsey is co-founder and CEO of Square and Twitter. To both learn and become more self-aware, he actively seeks out new opportunities that make him uncomfortable.

What advice should first-time founders heed?

Q1

Focus your attention on the things that will help you learn. That might mean asking better questions, thinking more critically or developing your problem-solving skills. I think anything that helps you learn better or faster will improve your outcomes overall.

For me, learning has been about continuing to ask “Why?” and eventually getting to “I don’t know.” That’s where the process begins. Square is a good example, because we jumped in knowing nothing at all about the credit card industry. We started by reading all 800 pages of Visa’s operating principles, which was the driest material in the world, just to get an understanding. The biggest “I don’t know” we eventually encountered was why someone had to go through a credit check to accept credit card payments. The industry put up that blockade in part because it didn’t understand its potential customers, and only about 30% of people were getting through. By starting from a place of trust and using new technology to verify that trust, we were able to get to over 90% and enable a lot more people to participate in the economy.

What question are you asked more than any other?

Q2

When I talk with other entrepreneurs, a lot of their questions are about how we think about culture and what it really means. I think culture is ultimately about alignment around a common purpose—the reason we wake up and work on this particular problem when we could be doing something else. Your company values will evolve over time, and you’ll have multiple missions. But the purpose is the thing that endures.

I think it’s also important to focus on team dynamics rather than hiring individual superstars, because those dynamics can make or break a company. It can also be difficult to see before people start working together, though, so one thing that’s been helpful for us at Square is doing more contract-to-hire recruiting. Candidates get to test us out before they have to go all-in, and we can assess how they contribute to the dynamic—and whether we’re aligned on purpose. Usually, someone either falls in love with the problem we’re solving or they don’t. Both sides can very quickly determine if it’s a relationship we want to continue.

What experience shaped who you are?

Q3

I grew up with a bit of a speech impediment, and that made me very, very shy. I was always worried about mispronouncing something or saying the wrong thing. Eventually, in fifth or sixth grade, I realized I had to do something to break out of that trap—so I signed up for the speech and debate team, even though it was super scary to me, and eventually built some confidence. It’s been an ongoing journey, even as an adult. Getting up in front of 25 employees is much different than speaking to 5,000. But I’m able to operate at a level I couldn’t have imagined when I was a kid.

And that goes beyond public speaking, because facing that fear led me to seek out other opportunities to do things that make me uncomfortable—in business, but also in my personal life, in everything.Those are the experiences that have benefitted and propelled me the most.

What’s the best interview question in your toolbox?

Q4

The first question I ask is “Why us?” People can take it anywhere, but the answer usually gives me an understanding of who they are and what they want out of their career. I’m looking for alignment of purpose, but also a willingness to think about problems and solve them in creative ways. Sometimes I’ll hear, “Well, it looks like this company is going to be successful,” and that’s the wrong answer to me. But other times, I’ll hear, “My mom has a coffee shop and couldn’t accept credit cards. I think what you’re doing would help her.” And if they go on to say, “But here’s what I think you’re doing wrong,” that’s even better.Some of the best answers go on for 10 minutes, because the person is so excited about the problem we’re solving.

Ultimately, I’m more focused on how someone thinks than on their skills. If you’re smart and creative, you can apply that to lots of different problem sets where a specific experience doesn’t add much value. None of the first 50 or so people at Square had backgrounds in financial services or banking, and that was actually really beneficial. They had completely fresh eyes and questioned a lot of what the industry took for granted.

What book should every company-builder read?

Q5

The Score Takes Care of Itself,by Bill Walsh, the former head coach of the 49ers. The writing itself is very simple and straightforward, but I got a lot out of the way he thinks about building organizations. When he came in, the team was the worst in the league, and it would have been easy to focus on winning games. No one can argue with that goal. But instead, he focused on very small details, down to taking care of the locker room and players tucking in their shirts. It gave the team a sense of pride and ownership, and within a few years, they won the Super Bowl.

In a company, I think a lot of the little details are about how we communicate, but it can also be something as simple as pushing in your chair when you leave a meeting room.That shows you’re respecting the people who come in after you and the shared space where we all create. If you’re paying attention to a detail like that, it helps you pay attention to details in the service or software as well. And with that daily practice, as we get better and better at those little things, they ultimately become the big things.

What’s a lesson you learned the hard way?

Q6

In the early days of Twitter, we had an amazing engineer who was a master of all the code—they kept the servers running and the service up. Unfortunately, though, they were also super negative, and that toxicity was bringing the whole team down. I knew that was the case, but so much knowledge lived in this person’s head that I was worried if they left, we’d never be able to keep the service running or scale it.

After about six months, I decided I had no choice but to cut ties—and the service did go down, but three people rose to the occasion and brought it back up. By finally removing that toxic presence, we also allowed new people to level up and advance, and eliminated the single point of failure that had been getting scarier every day.The lesson for me was to act more quickly—assuming I have what I need to make an informed decision—but also that I really need to pay attention to how a team works together, rather than just the individual and their skills.

What invention do you hope to see in your lifetime?

Q7

I’d like to see an internet-native currency that actually works globally. Bitcoin has already been invented, of course, and it’s come a long way—but there’s still a lot of work to do in terms of accessibility, security and speed before it’s something my mom can use to buy coffee. So it’s less an invention and more a constant iteration to get the adoption we need.

Having a sound global currency will enable so much more innovation and collaboration.Currency and communication are the foundation of everything we do; if we want inventions like better AI or flying cars, we need a better sense of traded value. And when something is global, with more people participating, that means more diversity of opinion. That’s how you start to see all the edge cases and solve problems that aren’t specific to just one culture or nation or group.