Seed – A Round – Proving Model


Much time is spent bemoaning the lack of aggression from early stage capital sources. Most of this energy is misplaced in my opinion. The real chasm companies struggle to leap, is to Enterprise Scale Solutions. Solutions that solve problems the Executive Suite of Blue Chip (F2000) companies truly care about and therefore will purchase. Many of the technology products and services consumed by Enterprise clients from SME (including startups) providers are isolated in what I will call Pilots or Islands.

These pilots or islands can be relatively large and long lasting, several millions dollars, run over several years, and touch thousands of users. I term these projects or deployments as pilots/islands because they do not register as strategic to the overall organization. Few if any other systems or processes depend on them and the relative switching (including straight deletion of the process) costs are low. Your core users inside the enterprise may scream bloody murder when you are displaced or turned off, but the overall strategy from the true decision makers will move forward with change regardless in order to achieve the broader more core goals of the company. Microsoft, Oracle, SAP, etc. are entrenched and scaled because their solutions deliver core value to the overall organization, replacing their solutions will have cascading effects that override the potential benefits of switching.

Winning Pilots is often a Series A funding trigger for enterprise software ventures. When it is not, its typically as reflection of a few things: the pilot customer does not reflect the ideal target, it is not a scalable implementation of the solution, the pilot is, has, or will not generate enough evidence to represent sufficient traction, etc.. This process, in my experience, is very similar within F500 organizations as they explore new offers and markets (funding from HQ vs. VC). The next major challenge, and often the project companies get stuck in, is post a successful pilot.

Transitioning from successful pilot to a repeatable and sustainable growth process is a Chasm a large number of companies find themselves trapped in. This chasm is not just trafficked by startups, I would wager the majority of teams in this stalled growth phase are SMEs. $5 – 50m annual revenue 10 – 300 employees, 10 – 100 customers, mix of professional services and product based revenue, 5 – 35% EBITDA.   In other words, a lifestyle business. Lifestyle businesses are awesome, if that is you and your stakeholders’ desired outcome. If you took outside money that has any notion of your business being a venture company, being a lifestyle business is painful. Wanting to grow the business for the sake of growth while in this phase is also fraught with risk for the owners personally and the business.

This chasm is the ideal conditions for Founderitis to run rampant and symptoms to metastasize. Startup founders focus on the positive evidence, ‘we have customers, revenue, etc.’; SME CEOs focus on the risk, ‘we are making money, we are comfortable’. Anyone who dares label themselves an entrepreneur has a dose of Founderitis. The question is how you harness the syndrome to the best benefit of the company.  In the Successful Pilot / Isolated Solution to Scalable Growth transition Founderitis constricts the vision of the key leaders limiting their ability to absorb and act on opportunity or required change. Optionality becomes so constrained that the business loses its momentum and dynamism, stagnating into the ‘lifestyle’ chasm.

If your company is not activating new revenue in a consistent, predictable process you are in the Chasm. If you sell a solution to a decent size market that drives a top or bottom line outcome for you customers; you should be able to forecast revenue growth with decent accuracy. A software startup that has exited the Pilot Chasm and has hit the Growth Curve should be generating better than 100% CARGR. The tactical ins and outs of individual sales cycles should only impact the velocity and amplitude of the growth curve, no individual deal should be able to knock it off the up and to the right shape. SME growth companies should be able to account for churn in the sales team and maintain predictable revenue results. Sales have become an engineered process, the sequence of inputs and outputs are known.

Yikes, we are in a Chasm; what the heck do we do? Confession, our Startup is in the Pilot Chasm, right now, scarier we maybe on an Island. I don’t have enough evidence on whether or not we are on island or not yet, so I am going to focus on the ‘known’ that we are in a Pilot Chasm. Like all problems, acknowledgement is the first step, take stock of the current state. Focus on evidence, categorizing Known Facts, Known Unknowns, Solid Assumptions, Weak Assumptions that require data, and your Current Progress Against Targets. Second step, given the evidence what trajectory are we on, does that trajectory and our current velocity propel us out of the chasm?

You need to run diagnostics on the state and severity of your Founderitis, right here, right now, especially if the evidence is showing you are not going to make it over the crest. If you are not on the roadmap you set to get out of the chasm, the leadership team has hard decisions to make. Founderitis is triggered by hard decisions. 

Our Startup is on course, we have mapped out rocks and potholes between us and the crest of the chasm. We have a partner at the top that we are roped to adding traction, we have enough capital to provide fuel, we have added talent to increase force, we have stripped off some unnecessary components to reduce drag, there are enough pilots & pipeline in process to absorb some bumps, focusing on keeping the engine turning is the core focus. Execution will keep the engine running. Three months closing on current opportunities and active pilots and we are up and out of the chasm.

There are still lots of risk. We have burned lots of fuel and have stripped off a number of the safety features; if our partner cuts the rope we will overheat the engine and stall.  The roadmap we have drawn is working, we need to keep our heads up for unknown unknowns and execute on keeping the engine running.

The question I worry about is what we will look like on the plateau above us? Will we come over the top and find ourselves on an island? For us this would be total dependency on our partner for revenue. There is also a good chance we will drive right into another Pilot Chasm in order to prove our engine is a standalone solution and not just a feature or our partners’. Good news is that we have a solid assumption that we will earn another round of funding once we exit the Chasm, thus giving us the ability to prepare a boat (to get off the island) or for another uphill climb (out of the chasm).

The key outcome of the process will be that we will have proven our revenue engine works. From there we will need to engineer a repeatable revenue generation process based on the proven use case. If we cannot repeatedly generate revenue on the product, we will have to take stock and iterate the vehicle for another rough and tumble ride through the Pilot Chasm.

The key takeaways:

1. Know where you are and where you are going, they call it a roadmap for a reason

2. Pilots are experiments to determine how your revenue engine should operate; they are not your business model

3. If you are not predictably generating new revenue you are stuck, Assess, Analyze, Act