August Topic: Surviving Startup

The Startup Curve is the primary reason new businesses run out of cash within their first five years. It is also applicable to existing businesses starting new product lines or beginning to offer new services.

Overview

The Startup Curve is the primary reason new businesses run out of cash within their first five years. It is also applicable to existing businesses starting new product lines or beginning to offer new services.

The Startup Curve

The story of most new businesses begins the same. The entrepreneur hits the ground running. Dedication yields a period where sales grow steadily. Then for seemingly no reason, sales decline substantially during the following period.

The Source of the Dip

Most new businesses receive a temporary initial boost in sales to people who already trust the entrepreneur, their “friends and family.” Similarly, established businesses that offer new products or services are usually selling to the same customer base they already have in place. This is great at the beginning, but it can lead to unintended consequences if the business doesn’t monitor the source and sustainability of the initial sales growth.

Example: The Challenge

Seeing the rise in sales (largely from the friends-and-family or existing market), the company leadership expects the trend to continue and generates forecasts and investments based off the company’s initial success. Investments often include: purchase of equipment/hardware, office space expansion, hiring of employees, etc. However, if the base of sales has not expanded beyond the entrepreneur’s friends and family, the market can run dry because the company has already filled the demand of the customer base. What once was strong revenue growth becomes a dramatic decline in revenue. The business churns through its starting capital by trying to support the increased overhead. As growth dissipates, the business is has already consumed the cash cushion cover the growing losses.

Here is the story told graphically:

Righting the Ship in the Startup Curve

A proven strategy to survive the startup is to quickly deploy a tightly focused marketing program. Thanks to the friends-and-family phase, the company has a track record and valuable intangibles such as market knowledge and price experience. The company can leverage these elements to create a persuasive marketing strategy centered around immediate sales. Long-term focuses such as “creating a presence in the market” or “establishing a brand image” are important, but may be a good future step. There will be no presence or image to curate unless every effort is put towards revenue generation through marketing.

Steps to Manage in Startup:

Here are some steps to manage the startup curve:

1. Preserve startup capital, keep expansion controlled, and maintain low overhead: If a significant portion of sales are driven by friends and family, recognize that a correction in sales is probable. Preserve startup capital. Resist the temptation to ramp up expansion by adding to overhead before you have transitioned through the initial startup period.  

   
   

2. Monitor the customer base: If a significant portion of sales are driven by friends and family, the Startup Curve may be knocking on the door. If the customer base is driven by marketing efforts and referrals, it is possible to bypass the Startup Curve.

   
   

3. Gain knowledge and insights on pricing and value proposition as quickly as possible: We call this the Launch Sequence. This helps you monitor your customer base and determine the market and price your services during the launch period.

The Launch Sequence

The purpose of the sequence is to diagnose and remedy a pricing equilibrium issue which is common among businesses experiencing the Startup Curve.

The “Why” Behind the Launch Sequence

Marketing capacity changes as more similar projects are completed. Thus, later engagements are priced higher than earlier engagements. Below is a sample of the launch sequence of a startup company, product, or service. Numbers will differ from business to business.

Engagements 1-5: The first client engagements are often free or almost free. The sell is about what we think we will do and it is evident that this is a new service.

Engagements 6-8: These engagements are serviced with a modest fee. The sell is about what we will do. Since experience exists, it is reasonable to charge some fee, but there is not enough experience to warrant full price.

Engagements 9 and 10: These engagements should often be free or almost free. The sell is about what we do. The provider knows that the services provide value to clients, but there is a misalignment between the value of the service and the perceived value of the service. This delta occurs because the engagement team responsible for the selling process is not yet able to fully reflect the value of the service provided.

The most common mistake takes place during these engagements. Business owners tend to perceive that the services are worth the full quote, so they charge the full quote. The customer shies away because they see the full quote, but the sales pitch doesn’t reflect it. The customer feels oversold. The other dynamic is that by engagement #10, the business owners are feeling tired and underpaid, so they feel the need to earn full payment for the job. They tend to oversell as a result. Many small companies run out of cash at this point because they fail to secure the sales. At this point, it is more important to get a foot in the door, gain experience, and build the portfolio than to charge full price.

Engagements 11+ : These engagements are at basic market price. The sell is about how we do what we do (and how we do it well). At this point the engagement team has enough experience so that the sell is from a truly experienced individual/team to a customer. The customer can see the experience and knowledge from the language and illustrations used by the engagement team. The customer does not feel oversold because the presentation of the service value aligns with the quoted value of the service.

A company can stabilize future growth by adding multiple products or services with different customer bases simultaneously.

Summary

The Startup Curve explains why many new businesses run out of cash early—initial sales driven by friends and family create a misleading growth trajectory, prompting premature expansion and increased overhead. When this temporary boost fades, revenue drops, often leaving companies with depleted capital and unsustainable operations.

Businesses should pursue revenue-driven marketing strategies, preserve startup funds, monitor customer sources carefully, and implement the Launch Sequence.

The Launch Sequence helps guide pricing and sales strategy by building credibility. It recommends that businesses start with engagements that generate very little revenue, and increase prices as experience, confidence, and perceived value grow. This sequenced approach creates opportunities to break free from the dependence on the friends and family market, and thus, the Startup Curve.