Revenue growth curves depend on Market Type!

Demand Curve Affects Revenue: The “demand curve” seeks the optimum intersection between sales volume and net profit. For example, if a physical product is most efficiently manufactured in lot sizes of 5,000, can that inventory be sold in a reasonable time when current unit sales are 50 a month? A startup selling new electric cars for $29,000 will generate massive demand. But if they cost $45,000 to manufacture, the company will go bankrupt very quickly. Consider:
The actual price per unit, for multiples, and for subscriptions how pricing can be used to attract more users.
How pricing can create larger or more frequent purchases by the same user; volume discounts, free shipping, loyalty points and similar pricing mechanisms are used for what’s typically called “market basket” optimization.
How pricing can be used to enhance profitability or volume
How the company can forward-price the product to intersect the economies-of-scale curve (as in, “If we could build 10,000 at a time, our production cost drops 32 percent”)

When to Bring in the Accountants

Eventually, prospective investors, banks, and others will want to see the traditional P&L, forecast, and more, and that’s fine. Once the metrics that matter are firmly understood to make sound business sense and are validated, almost any finance type (or high school math student) can convert them into a VC-ready multiyear P&L spreadsheet, balance sheet, and cashflow statement (the “usual stuff” everyone is accustomed to seeing) with ease.

On rare and welcome occasions, metrics that matter actually don’t matter at all. If customer acquisition and activation are proceeding at warp speed month after month or the economy is hot, investors may ignore most of the other metrics, throw caution to the wind, and vote to scale the company rapidly. This seldom happens, but we hope it happens to you. It can happen more often in frothy vertical markets, as it did in social networking and other multisided markets or strong IPO markets,. But nine times out of 10, the metrics that matter do matter quite a bit when it comes time to spend serious investor dollars.

Adding it all up

This phase is a vital make-or-break analysis of how well the business model should work. But remember that the numbers are still only educated guesses, validated—we hope—through extensive customer discovery and validation effort with scores if not hundreds of customers.

Pivot or Proceed: Re-Validate the Business Model

It’s the perfect time to take one last look at the key business model components, for several reasons. In a few days, a great deal will change if the vote is “go forward” to the customer creation step. Customer creation is a radically different stage during which the company suddenly shifts from “searching for a business model” to “executing one.” It’s no longer celebrating mistakes and wrong turns. It shifts full-throttle into “execute” mode, with revenue targets and timetables to hit, product and plans to deliver, and more granular and precise accountability to investors and board members.

The company is about to spend a great deal of money far faster, and irrevocably, as it works ambitiously to deliver its chosen business model. With that comes the typical “career risk” for founders, which always prompts investors to ask if the seemingly manic “founder type” should be replaced by a “seasoned” leader with proven execution skills. Massive amounts of money are about to be spent on a single, focused bet that the business model, as developed, has a high likelihood of scaling to profit and success. Boards and investors are suddenly less forgiving and typically far less welcoming of reports like “That idea was wrong” and “That didn’t work as we hoped” than they were during the earlier “search” phases.
Long story short, it’s time to revisit the core business model elements one last time.
Best Bets

You’re almost done. You’ve run the numbers in the last section and are still feeling like your business is a winner. But have you picked the best value proposition? Is your product delivery schedule right? Are you confident you’ve gotten the optimum revenue model and costs? And have you missed any best moves on the overall business model? Here are a few last things to check.
Make Sure the Value Proposition is Right

After going through the “metrics that matter” in the last section, are you absolutely convinced you have the right value proposition? You’re about to live with it for awhile. If you don’t feel that it’s going to win the marketplace now, it doesn’t get better over time. It may be time to reconfigure, repackage or unbundle the product. This requires a loop all the way back to customer discovery. Once there, use the core technology to develop another product, configuration, distribution method or price and then modify product presentations and return to Phase 3 (product presentation) and do it again. Yes, it hurts, but it hurts far less than failure.

Make Sure the Product Delivery is Right

Even with selling success, check the product delivery timing with the product-development team. Schedules inevitably change, seldom for the better. Can the company still deliver what was just sold and do so as promised, or was the sale actually vaporware? If vaporware, at best the company secured a few pilot projects. Continuing to sell as if nothing has changed is a bad idea. As schedules slip, hard-won earlyvangelists weaken, and references evaporate quickly. The good news is, if this happens (it happens often), the situation is still recoverable. There aren’t many people to fire, and the burn rate is low. (As discussed earlier, it’s always important to have enough cash to get this phase wrong at least once.) The solution is to shut down any additional selling for a while, admit mistakes, and turn pilot projects into something useful—first for the customer and then as
a marketable product.
Make Sure the Revenue is High and Costs are Low

There’s nothing worse than leaving money on the table or spending more than you needed to. The best way to answer these questions and more is to “walk” slowly through the business model one more time.

Start with the value proposition. Are there too many features or not enough variety? Would a lower price sell far more units or sell the same number at a lower acquisition cost? What if the product were free, or free to those bringing three or five or 10 other customers along?
In the customer-relationships hypothesis, is there rock-solid confidence in the plan, or might a freemium or multisided alternative deliver bolder, faster growth? Will that costly AdWords effort deliver the planned result? Can a different channel deliver fewer sales and more profit? Will partners deliver the revenue growth you need and expect?
Are there higher level business model patterns you may have missed?

Make Sure Your Business Model is Right

Grab a fresh business model canvas and a pack of Post-it notes. Explore alternatives seriously. The team is about to put a big pile of chips, probably millions, on “red” or “black,” as in “pass” or “fail.” Is everyone confident the choice is the right?
Changing direction at this juncture is a bold move indeed. It’s not what the investors expected, especially after a long, grueling process of customer discovery and validation. Then again, bold moves are the work of great entrepreneurs. And even though a pivot at this point leads to more customer validation and more time, it’s far better to pivot now than to forge ahead at full speed and full spend if it’s possible that there’s a better idea out there somewhere.

Further validate the business model, not just looking for enhancements in revenue opportunity and places to reduce cost, but looking for “game changers.” Can you change a product sold by features into a branded-experience that becomes a “got-to-have-it” fashion? Can you change a revenue model from a unit sale into a network effects model? Look for the nonobvious business patterns. Even if the team is certain the current model is the best way forward, now’s the time to bring in your advisory board and have them throw stones (painful as it is) at your canvas. Do they see a huge move that you missed? No doubt the financial model review just completed raised at least a handful of questions and perhaps pointed to some opportunities. Revisit the business model checklist questions. Are any of the answers different? Does the team want to have more money in the bank or spend less? Where can savings be effected or additional dollars efficiently put to good?
If the team has turned over every possibility in its review, looking both at radical changes and modest improvements in the business model, and confidence still carries the day, it’s time to move on to the ultimate question: pivot or proceed?

The Toughest Startup Question: Pivot or Proceed?

This is the moment of truth when the team and the investors will vote on whether to begin spending massive amounts of money to execute the business model. To vote honestly, the team needs to take a hard, honest look at the pivot-or-proceed analyses developed in this phase.
As grueling as the customer validation process is, it’s quite likely that the company will require another turn of the wheel before everyone can enthusiastically vote to move forward. Don’t despair—this need to pivot arises almost every time, and often calls for a return all the way to customer discovery.

Hubris is the evil twin of a passionate entrepreneur.

The alternative is even more painful. In the past, investors magically assumed flawless execution and fired executives who failed. It’s time to reflect, thinking seriously about the company’s genuine chances for scalable, profitable success. It’s a hard decision, particularly for self-confident entrepreneurs who pride themselves on their tenacity, and problem-solving abilities. “I’m an entrepreneur. I make things happen against all odds” just doesn’t cut it when staring at the hard facts and statistics. Don’t confuse hubris with passion or facts.

Did validation really convert opinions to facts, or is everyone just moving the goalposts to reach customer creation? The next step seriously cranks up the company’s cash burn rate, sharply diminishing if not extinguishing available cash or runway.

Did the product sell well and easily? Is it absolutely, unequivocally clear that when more money is spent to acquire customers, they’ll arrive at a steady, predictable, profitable pace? This question in particular probably sends 90 percent of startups back into the depths of Customer Development to refine and retest components of the business model.
If the “ramp” to more customers, revenue and profits isn’t proved to be predictable in test results, it’s also a reason to pivot. Using everything you learned in customer validation, go back to Phase 1 of this step (get ready to sell) and try it again. Sorry. This isn’t easy to do.

If everything checks out (again, it seldom does the first time around), the end of customer validation is a major milestone. Customer problems are understood, a set of earlyvangelists has been found, and the company has delivered a product its customers want to buy, developed a repeatable and scalable sales process, and demonstrated a profitable business model. Hopefully, all the learning is captured in writing and the business model diagram is updated. Fundraising, while never easy, will be far easier than at this point than it was before. When you’ve answered “yes” to that taxing list of questions, you deserve a night off, if not a week. Congratulations! The company is prepared to move full speed ahead to the customer creation process.

What’s Next?

The first two steps of Customer Development are where entrepreneurs live or die in the search for a repeatable and scalable business model. When a company has successfully exited Customer Validation, there’s a library full of business-building texts available to help execute the business model. So, at least for now, if you’re eager to execute the next two steps—Customer Creation and Company Building—return to the original Four Steps to the Epiphany, or turn to a more targeted text for fine-tuned support.
Whatever you do next, the successful completion of Customer Validation is a momentous step in the life of your startup. You have completed an arduous, challenging journey. Our warmest, most sincere congratulations. We look forward to learning about your success!