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As an angel investor, I am shocked by the growing number of founders who are fully focused on the next round of funding. More often than not, I see pitch decks showing the number of app downloads, website visits, or free trials, but no monetization information. Sometimes during the conversation with the founders it becomes clear that they did not even understand their business model again.
Although in some cases it is acceptable to depend on the next round of funding for 10 years or more due to the nature of the business, focusing solely on fundraising is a very risky strategy and can lead to bankruptcy if the founders fail to secure the next round of funding. funding cycle on time.
All the while, I couldn’t help but wonder, “What if the founders focused on go-to-market strategy and monetization? What would be the difference?”
Being an angel investor has certain advantages. Six years ago, I invested in a “trading experiment” called Transform. I call it a “business experiment” because the business was built in an original way, followed no widely accepted fundraising practices, and I was fully prepared to cancel the investment. At the time, the risk seemed so high.
Still, the experience was worth the risk. This could prove that focusing on go-to-market strategy and monetization early on could move the needle and reduce the death rate of startups in any angel investor’s portfolio.
I may have been lucky. Maybe my background in financial strategy helped a lot. Either way, Transformify exceeded all expectations. The HR software publisher has achieved profitability in three years, 650% revenue growth in the first half of 2021 and 950% revenue growth in 2021, with no funding cycle involved.
So what’s the secret and can startup founders replicate it? Definitively. Here’s what I did differently.
Monetization, monetization, monetization.
From the beginning, I had a monetization plan and the product roadmap was tight. Also, the money I was about to invest was divided into stages so that less money was invested after monetizing the first features.
It sounds easy, but how do you get people to buy a new product?
You might be surprised but the product was not monetized first. Transformify is designed as an enterprise workforce management system around modules – Applicant Tracking System (ATS), Freelancer Management System (FMS), Vendor Management System (VMS), etc. . Even the first module, Freelener Management System, would take over three years to complete. We didn’t have three years because no venture capital funding shortened the business runaway. We needed to monetize, fast.
So what have we monetized? It was our mailing list. Back in 2015, remote work was still reserved for digital nomads, and the announcement that Transformify was launching as an all-remote company relying on outsourced freelancers through its own platform got a lot of attention. The Transformify HR blog was launched first. The mailing list was growing like crazy, and naturally we started an affiliate program to monetize it. For an entire year, the revenue we generated was enough to continue product development.
Can this early monetization strategy be replicated by all startups? If not by all, by many. Think about your “assets” and create them from the start. There are always “low hanging fruits” whether it’s blog mailing list, traffic to your website, early partnerships, etc. Affiliate and referral programs are often overlooked by founders and they shouldn’t be.
Monetize the pilot version of your product.
You heard me right – the pilot version can also be monetized. To do this, you must establish strong links with the industry. If neither of the founders has prior industry experience and network, the road is through accelerators and startup competitions. The pilot version of your product may have limited functionality and the technology may not be stable, but your industry partners will always be willing to pay if you demonstrate future benefits. In addition, many companies have programs dedicated to startups and budgets are allocated to partnerships with startups.
In our case, Transformify participated in two acceleration programs: Big K-startup challenge in South Korea and Vienna Sales Agency in Austria, followed by a grant received from Innovate UK.
Speaking of grants, these are not to be overlooked. A well-written grant proposal has the same chance of success as a funding round. Plus, writing grant proposals means you’ve worked hard with your business plan, and the same materials can be reused when applying for accelerators or raising a funding round.
Say ”No” to certain customers.
Transformify hit profitability in 2019. Yet back then, much of the revenue was generated through the affiliate program and some key partnerships. The most difficult thing was to understand how to develop the clientele. In early 2020, we would be onboarding all customers, regardless of company size and workforce.
Soon it became clear that it was not enough to measure customer growth in terms of the number of newly onboarded business customers each month. Instead, we had to invent more sophisticated KPIs around customer quality. This perspective led us to some interesting insights: there were “high maintenance” clients that needed a lot of attention, custom features, and so on. Yet these customers combined generated less than 3% of revenue. At that time, we had the ”no go” customer profile and, believe me, that’s as important as your ”buyer persona” — the profile of your ideal customer.
Saying “no” to certain customers allows for better scalability and higher profit margins.
Focus on the market.
The next step is the go-to-market strategy. How are you going to penetrate this market? Is it cheap in the first place?
Many startup failures are attributed to a go-to-market fiasco. Not fully understanding your audience and where to find them can burn through marketing budgets faster than melting ice on a tropical beach.
Your competitors are on Facebook and Twitter. Do you also need to invest in these marketing channels? Not necessarily. Your competitors might not achieve enough ROI (return on investment) and if you follow them, you will fall into the same trap. Google Adwords, Instagram, TikTok, YouTube, etc. are all mainstream social media channels that are not equally good for all businesses. Sometimes the best strategy is to invest in niche marketing channels like major industry blogs, influencers talking specifically about your industry, topical podcasts, etc. The return on investment is likely to be much higher.
You have achieved profitability and sustainable growth, what’s next?
By following the steps above, my Transformify “business experience” achieved 650% revenue growth in the first half of 2021 and 950% revenue growth in 2021. I hope the results will inspire for many angel investors and founders.
However, achieving profitability and sustainable revenue growth are only milestones, not the end of the road. Now is the time to think about your “exit strategy”, whether it’s an IPO, an acquisition, or a series of funding rounds at a much higher valuation versus a early fundraising. Leading a business to a successful exit is always hard work and well worth it.