Hunters, farmers and investors
By Dr V. Sivapalan July 24, 2013
- VC, angels and grants – the one source of funds no one ever talks about is revenue
- But how do you make money and attract investors to you, and not have to chase them?
I HAVE been asked on several occasions over the last month about venture capital (VC) and angel funding, and how companies should value themselves.
Most of the entrepreneurs who have met me are trying to raise more funds for their ventures. Grant funding inevitably enters the picture as well, especially Cradle Fund’s RM500,000 commercialisation grant, or the CIP500 grant.
Strangely, the one source of funds that no one ever talks about is revenue and how the company can make more money to fund itself.
Coming from an older generation of entrepreneurs from the 1980s and 1990s, when the ONLY source of funding was revenue generation, I usually spend more time talking about their revenues rather than VC, angel or grant funding, and I have discovered that almost all of these companies are neglecting revenue while they search for equity or grant funding.
Let me state however, that when the company is in the early stages of development or the startup stage, it may not have developed a viable business model and thus it may not have found a sustainable way to make money.
That’s why Steve Blank, the author of The Four Steps to the Epiphany: Successful Strategies for Products that Win, says, “A startup is an organisation formed to search for a repeatable and scalable business model.”
In simple terms, a business model describes how your company makes money.
So while the startup is searching for a business model, it needs to raise funds from family, friends, angels and grants, but once it has a repeatable and scalable business model, it should focus its efforts on generating revenue by scaling the business.
But this is where many of our companies have a problem. Even when they have discovered a business model, they still act like a startup and do not go after revenue as they should.
My discussions have often then focused on how these entrepreneurs can drive more revenue and generate more money for the business. In fact, as the business makes more money, it actually becomes easier to attract investors because they will look for you and you don’t have to look for them.
Yes – if you want a higher valuation, make them come to you and not the other way around. Trust me, investors have ways and means of sniffing out a good deal and they will find you.
So how do you make more money?
It is easy to get distracted when you’re running a business. Don’t be distracted; stay focused on your business and your target customers.
Once you determine who your target customers are and once this target has proven itself as a viable revenue generator, go after that target market with a vengeance.
Until you have hit 90% of this target market, don’t rest on your laurels. By focusing on your target and working hard and smart, there is no reason why you cannot make money.
Learn to say NO!
As an entrepreneur, opportunities will drop into your lap all the time. Learn to say no to opportunities that don’t match your target strategy.
Once you start considering everything, you will lose direction and you will generate even less money from your real target customers.
Remember the 80:20 rule
This is also known as the Pareto principle. The term was coined by management consultant Joseph Juran who named it after Italian economist Vilfredo Pareto, who observed that 80% of the land in Italy was owned by 20% of the population and that 20% of the pea pods in his garden contained 80% of the peas.
In business you will discover that:
- 80% of your profits come from 20% of your customers;
- 80% of your sales come from 20% of your products; and
- 80% of your sales are made by 20% of your sales staff
You must therefore find that 20% of customers, products and sales staff and if you do, you will generate a lot of revenue for the business.
The problem is that very few, if any, entrepreneurs know what these are and hence work hard but deliver too little, revenue or otherwise.
Concentrate on ARPU
The telecommunications industry is super-focused on ARPU or ‘average revenue per user,’ which means generating higher and higher revenues from the same customer.
It is very hard to find a customer, but once you do, you must find ways of servicing that customer well and making sure that customer buys more and more from you.
To do this you need multiple products to sell. I have come across entrepreneurs that develop just one or two products, and then keep looking for new customers to sell to, but not doing more with existing customers.
A customer who has bought something from you shows trust in your company and is the easiest to sell to. Keep developing new products all the time, find out what your existing customers need more of, and sell them more.
As you increase your customer base and ARPU, you will make a lot more money.
This is probably one of the best rules for revenue generation, but sadly, probably one of the most ignored too.
Create a killer value proposition
Selling is not hard; creating a solid value proposition that is highly desired by customers is the hard part.
If you have a killer value proposition, there is no reason why customers will not buy except perhaps if the price is beyond their reach, but pricing is easy enough to adjust.
So you have to work on the value proposition and ensure that your product meets customer needs or solves real problems.
Again, in the case of many companies you will be hard pressed to find solid value propositions for customers. Sometimes you will even find entrepreneurs building products that no one wants.
Get the value proposition right and the sales will roll in.
Create specialisation in the sales team
Finally, to make sales you need a great sales team. So unless you’re doing everything online like an e-commerce store or selling an app, you will need a super-efficient and driven sales team.
Even here you should create specialisation. The normal model is the hunter-farmer model. Hunters look for prospects to convert to customers, while farmers work with existing customers to increase ARPU.
It takes different types of personalities to be hunters and farmers. While a hunter needs to be the highly driven, take-no-prisoners type of personality who will seek out new prospects and convert them into customers, the farmer needs to be a people person who builds relationships with customers, services their needs and then upsells new products and services to them.
Farmers don’t have to be as hardnosed as hunters because increasing ARPU is often based on understanding deeper customer needs via a good relationship with the customer, and then persuading them to buy new products.
In addition to this, you can also have a pre-sales team that concentrates on identifying prospects, building mailing lists, making calls and securing appointments for the hunters. This frees up hunters to focus on selling to the prospects.
If only entrepreneurs would spend more time perfecting their business model, understanding customer needs, building revenue generating capacity and formulating a super sales strategy, they could be generating a lot more sales and cash and their needs for equity or grant funding will be much less.
The bonus is that as they do better and better, the investors will seek them out – it is much easier to secure an investment this way than if they went out looking for investors instead.
So my advice to entrepreneurs is to focus on customers and sales, and don’t worry about investors or grants. If you get this right you will do very well indeed.
Dr V. Sivapalan is the chief evangelist at Proficeo Consultants, a company which coaches and mentors technology entrepreneurs, and is also an angel investor. He believes that Malaysia has the potential to create many successful regional champions and is working on making it happen.
Hey, VCs: Market trumps team
‘Yes we can, too!’