Investing Pre-adoption (or How the Grinch Stole Christmas)

Last night was the Internet People Christmas Party. I talked to a number of start-ups, but generally felt like the Grinch spoiling an otherwise perfect Christmas pitch with my perennial “Where’s the revenue?” question.

In all fairness, there is one other metric that drives investor interest in a pre-revenue business: Traction.

Nic highlighted his thoughts on pre-revenue companies, which in turn reflects Ben Holmes of Index’s thoughts:

… if there is no revenue model then the only way you can invest is if customer acquisition costs are zero, or very close to. That way you only need to be able to make a small amount per user to make the business model work, and it is pretty safe to bet you can get that from somewhere.

An older, must read post is Fred Wilson’s post on Traction.

I am a user of (some) Web 2.0 services (Flickr in particular, and I pay my 24 peanuts per year for that service). Even as a seed investor, I won’t put money into a software company unless I see some customers. I certainly wouldn’t consider a pre-launch business- there are endless posts on how cheap it is to build web applications- there is also a tried and true method of offering consultancy services and using that to fund the build- i.e. getting a customer to pay for the application.

2 thoughts on “Investing Pre-adoption (or How the Grinch Stole Christmas)

  1. Jason, that is a pertinent point.

    I think from the start-up companies’ point of view, they need some mentoring and some contacts to make those first, low-hanging fruit type sales. I am not sure to what extent their ‘angel’ or ‘boot-strapper’ provide this crucial input or help connect them with useful people who can. In Uni tech-transfer settings, mentoring is an important input and helps some of them tide over this hurdle so a VC doesn’t consider them a waste of time.

    In other contexts, however, it may not be simple. Any networking-fest is over-run by people keen to advise but few who can help get sales. Sometimes, in my experience these start-up firms are not keen to give a fair return to sales rainmakers.

    Impasse? What do you think?

  2. You’re exactly right. Most really early stage companies do need some advice/pointers on low hanging fruit or steps required to engage customers or potential customers. More often that not companies don’t need funding (in the near term) in order to progress the business- they need customers/beta testers/feedback.

    Giving advice can come back and bite you, so I try to be careful there… However, I’m more than willing to help where possible/practicable- I’ve even recently offered a company hosting and bandwidth to open their private beta up to the public- just to see how the traffic numbers grow.

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