Make Customers—Not Investors—Your Priority

One thing I hear founders discussing is raising the next round of growth capital from venture capital investors. That’s their goal. They orient everything the team does around it. They spend time figuring out what metrics investors need to see to be comfortable investing. Then they work backward to hit those metrics.

I know a founder who set a goal of raising a few million for his seed round, even though he had sufficient capital in the bank. He heard that seed-stage investors want to see a few hundred thousand dollars in revenue before considering writing a check. He wasn’t close to that, so he found a way to get there fast. His software product was sold on a subscription basis (monthly or yearly), meaning the revenue was recurring every month or year. He decided to run a promotion to give new customers lifetime access to the product in exchange for a one-time payment at a heavily discounted price. The result was a surge in new customers and one-time revenue.

The founder hit the metric that seed investors wanted and got meetings with dozens of firms. The problem was that the quality of the revenue was low. First, the revenue wasn’t recurring, but the costs of running the platform were. Next, the customers weren’t people who were enthusiastic about the product because it solved a problem for them. Rather, they were bargain hunters who were loyal to getting something for a steal. They were never satisfied, and they needed a lot of handholding from the service team to onboard and use the product. They just weren’t an ideal customer profile for his product. After many conversations, the VC firms decided against investing in this company—I assume for these reasons.

The lesson from this is to start with the right goal. The goal of any company should be to satisfy and bring value to customers by solving a problem that’s sufficiently painful for them. A company that succeeds in doing this produces positive metrics (revenue, retention, engagement, etc.) that investors like to see.

All companies need capital to stay alive, but continuously raising capital from investors shouldn’t be the end goal. Instead, it should be the byproduct of having created something that satisfies customer demand for a solution to a painful problem and that has the potential to scale tremendously. By focusing on the customer and creating something they want, you up your chances of getting capital from investors (if you even need it).