It might be the most frequently asked question by early entrepreneurs. If not that, the most frequently heard frustration from founders is, “I have customers, why can’t I raise capital?”
Let me jump right in on the secret I’m about to reveal: customers aren’t the answer you’re seeking.
Which is to say, the magic number of customer you need to have is… as many as are needed to alleviate investors concerns for your gaps.
Not only does the question not have an answer, asking the question shows a misunderstanding of what investors seek.
Worse perhaps, investors who tell you otherwise are full of it and I want you to send them this article if any investor ever tells you that customers and revenue are what will lead to their funding you. They’re not lying (they might simply not really be wanting to invest) but unless what they really mean to say is that you aren’t fundable and need to focus on your own revenue, or that you need more customers/revenue to overcome their lack of confidence, what they are doing is misleading you. Customers in and of themselves won’t result in you getting funded and suggesting as much causes entrepreneurs to prioritize customers and revenue.
Maybe you do need more customers. More often, you don’t and something else is wrong.
“Investor” is someone putting money into something in hopes of getting more than that back in the future. That’s what investors do in hedge funds, on Wall Street, and in investing in companies. Investors are not banks, they aren’t credit cards, they expect a future greater return than is possible today, by investing in what’s being done.
So what do customers (and by that I presume you mean people paying for what you’re doing – customers give you money – revenue), what do customers have to do with INVESTORS’ potential return on investment?
Very little in and of itself.
Don’t misunderstand that point, without customers and revenue you very likely don’t have anything (though we know from Twitter and Medium that’s not accurate) BUT just customers and revenue are meaningless to an actual investor – go get a loan and you can pay it back from revenues.
So what do customers help investors today understand about your business?
- Depending on how you acquired them, that you know what you’re doing and that people want it
- That there is a market for it, and depending on how you found that market, how competitive it is, and what it cost to acquire those customers, that there is an opportunity
- That the company has a more clearly measurable way to establish a value (multiple of revenue; that multiple being dependent on what you’re doing)
But think about that…. therein is there anything that assures an investor on a return on their investment far greater than what they put it?
No. No investor will invest because you have customers (alone).
Thus the number you need to have depends. This is wherein your startup is actually validated, are you accomplishing the things that actually matter, evident in some customers proving that? Customers are merely evidence of your validation, not the validation itself and how many you need depends on all of your shortcomings as an investment opportunity. Shortcomings in areas such as:
- Do you have an experienced team in place capable of building a bigger business?
- Are there many competitors in the market, competitors that will arrest your growth at some point, or make it very difficult to achieve the size (value) they’d need?
- Is there brand, IP, or other risk in what you’re doing?
- Are those genuinely acquired customers or friends, family, and referrals?
- Have you shown that you can reduce the cost of acquisition and improve the performance of the business?
- Is the business scalable, how much so, or the likes of which is just measured growth? (Sales oriented and service based businesses generally aren’t scalable)
Funding is the result of such shortcomings being overcome by points of validation (growth, attention, revenue, etc.) sufficiently to substantiate an opportunity. How much of that do you need? It depends.
Even then, what really matters to investors is…
Do you INTEND to exit? Do you intend to get acquired or IPO? Is that even possible? Do you know from whom? How? And whether or not a suitor even make such acquisitions?
If the answer is no to any of those questions, you are not getting investment.
Why? The investor, the INVESTOR, is seeking the return on their investment – not that you have revenue. They’re asking if you have revenue, they want to see revenues, but THEY don’t get an ROI just because you’re making money. If they won’t get that return, it doesn’t matter how successful your business, they’re not giving you more money just to have. Would you? Would you put money in Wall Street Stocks if you could never get it back? Of course not.
For example, your business is growing like a tree! MRR is up, cost per acquisition is down, and you now need capital to fund a new market or feature. But you don’t have a CMO (big red flag for investors). Without a CMO you can succeed, you certainly can deliver a return, but you’re working without someone who knows why they’re doing in the market whereas your largest competitor (all hypothetically of course) has the best CMO in the space. All things being equal, where would you invest? So you lack that CMO… but you have thousands of customers and revenue – you can go hire an incredible CMO. There you go.
Customers and revenue help you overcome the gaps in what you’re doing to alleviate the risk investors take in investing in your business. Those thousands of customers and revenue is worth precisely zero to investors if you can’t deliver their return.
That’s what you have to be ready to show investors, and your customers/revenue traction are only one factor that capable investors consider and even that one factor does two things: Customers help establish a value and opportunity in the business AND having them mitigate the risks a result of your shortcomings. Find that balance that meets investor expectations.