We had seen how Strong Founders strike a powerful resonance with the Investors and why that tops the list of Investors Expectations (IE). And when we talk about the IE, they are linked to each other and do not exist in vacuum.
Next in importance only to the Founders is their definition and understanding of the target Customers.
At every session of mine at the Founder Institute where I serve as a Mentor, I bring in a very powerful customer element regardless of the topic, so much so that most of the participants and the directors of FI believe that I have an hidden agenda to promote customer understanding whenever I open my mouth. In fact, there is nothing hidden about my agenda.
If you have got your customer right, then half of your startup struggles can be taken out. On the contrary, it is only because that most startups ignore this basic building block that they land up in trouble at every occasion possible.
Although I have cried hoarse about the importance of getting your customers right in my blogs earlier like this and this, suffice to say that being very clear of your customers is extremely critical to the survival and growth of your business.
In this post, I shall address the criticality of this clarity on customers in the context of Investors.
Why are Investors concerned about clarity on the customers and what do they specifically look for?
- Customers are the only reason for any business to exist because they consume (or choose not to consume) what the business offers. For this blog series, the target customers are startups who are either in the process of raising funds from Investors or are planning to do so in the near or distant future. If there are no startups raising money then my blog series would be like talking to a wall.
- A startup has very little resources of people and money and cannot afford to fritter them away in an unfocused manner. Getting the customers right is the first way to build the focus because right from team building to product development to launch to marketing activities, pretty much everything revolves around the customer. I recall the instance of a client of mine, who, prior to his engagement with me, had spent huge amount of money and delaying the entire launch in building an iOS app for his offering. He realized that it was a complete waste, quite late in the journey because the penetration of iPhones in his target segment was close to zero. He had spoken to some of his friends and all of them were using iPhones. He assumed that they would be his customers and hence proceeded to build the app on the iOS platform. He was left with very little budgets to grow his business although he had a very sound offering because he had not invested time in getting his customers on sight.
- Startups normally raise funds to grow their business and growth is centred around customer acquisition and retention. If the customer definition is vague or very sweeping, then the startups would spend all their funds in chasing a wide variety of prospects and may not get the desired result. The number of startups who closed down after raising funds because they ran out of funds is legion and any close examination would reveal that they were quite casual in defining their customer.
- If the customer definition is too broad or too narrow, then that is a red flag. Too broad means too many targets to chase and hence quite likely that the startup will end up starved of funds very quickly and fold. Too narrow spells trouble because there is no possible growth after a stage and hence there would be no further investor interest. Startups that refer to ‘any retail shop’, ‘any educational institution’ fall in the first category whereas those who define customers as ‘airlines from India who are flying overseas’ as the latter.
- Is it a B2B (Business to Business), B2B2C (Business to Business to consumers) or B2C (Business to consumers)? I have personally seen pitches that involve two or even all the three when it should have been just one. Startups that try to cover all three options are genuinely convinced that there is potential in all the approaches and do not want to miss out on the opportunity but seldom realize that they do not have the bandwidth to do justice to even one let alone all 3. As someone who has conceived and launched products in all the 3 dimensions, I know the amount of paradigm shift that is required every time and on every front and the pain when the shift doesn’t happen or happens with a lag. Walmart built its entire business focussing on the B2C approach and then created a new entity called Sam’s Club for the B2B.
- Are there clear identifiers in the customer definition or are there labels? It is very common to find references to SMBs or SMEs or large scale in many pitches and often that is the bone of contention. There is no clear definition of who’s a SMB because multiple agencies define it to suit their purpose. It makes better sense to talk of businesses with an employee count of 100 or more as a potential customer and it is easy to verify that in the field.
- Are the proposed marketing infrastructure and activities aligned with the target customer definition? Are full page ads in english dailies proposed when the potential customer lives in a rural or semi-rural setting? Or is a tie-up with a MNC bank envisaged for reaching out to prospects in tier 2 towns? It might look very obviously misplaced but if we observe the kind of promotional activities being undertaken by businesses, we can easily spot the lack of alignment.
- Have the founders got the sales process in place for the chosen segments? I have seen projections of milestones in customer acquisition that are unrealistic in the first place and those are largely because the Founders are largely clueless about the dynamics of that segment in terms of decision-making cycles and seasonality.
- Is the fulfillment process in sync with the target customer segment? This is extremely critical because ramping up customers when they cannot be served is a short recipe for disaster.
Long story short, Investors love Founders who have a clear grasp of the Customers and are very suspicious of those who may have a great idea or even a working product without an understanding or appreciation of their customers.
So if you are a passionate Founder, work on your customer segment thoroughly before you even prepare an investor pitch.
In fact, the thrust of our engagements on ExSell Consulting Service is on our clients investing quality time in consciously building their customer persona.