Too Much Too Soon = Disco Inferno. Early enterprise adoption success shouldn’t always translate to massive additional funding.
Huh? Heresy! Yes, I do know that [fill in unicorn startup] raised [silly number] [twice] [in four months][with only 1 slide], but that doesn’t mean you should (or can) do the same.
Founders with early customer success should be asking if now is the time to pour more gas on the fire and feed the flames. Cheap burn rate puns notwithstanding, there is no formula to build a successful enterprise business. But if we had to rank variables from our perch at Promus Ventures, it would all boil down to one thing: customer adoption data.
Oh come on, I already know that, you say. Well, here are three signposts that early enterprise startups traditionally follow that, while good, do not necessarily mean it’s time to dramatically turn up the heat (here all week):
- Positive Customer Meetings/Feedback: When we talk with a) decision-level executives looking to work with teams in which we invest or b) see quotes in startup decks about how much a top-tier customer likes the product, this feedback does not translate to “open up the floodgates.” Much track left to lay until you get to MRR. We like to look for executives who want to use the product engine asap however ugly the UI/UX is currently.
- Customer Pilots Initiated: Yes, we know that paid pilots are important and in early days a very important step to prove a thesis, but until the data shows what is and is not working, it is a stretch to believe that it’s time to scale up the burn. Many times, pilots require additional cash in which to service a large customer, but even then the amount of capital (and subsequent dilution) teams should take must be tempered. Your valuation has not skyrocketed just because you now have a pilot initiated.
- Customer Contracts Signed: Come on! It’s time to run! Sometimes it is, but how did the pricing of the contracts come in? Did the customer want to adopt the product but isn’t willing to value it where you need to generate a substantially high margin business model? Teams with high burns can get in serious trouble here (we’ve been there), in that the product is good enough to be useful but not jumping-out-of-chair useful to command a high price.
It is a tightrope for founders and investors to extrapolate out early good news to figure out the meaningful amount of followon capital and dilution for each cycle. Better to let customer data answer how and when to fuel up than end up in Disco Inferno. We can all agree that ended badly.
Recipients of this post are not to construe it as investment, legal, or tax advice, and it is not intended to provide the basis for any evaluation of an investment in any fund. Prospective investors should consult with their own legal, investment, tax, accounting, and other advisors to determine the potential benefits, burdens, and risks associated with making an investment in any fund.
