By Jan Rosenbom, CCO at Keystones
Dear research-based tech startups: “Build it and they shall come” is NOT a strategy …
I had an awesome meeting today with the founder-CEO of an amazing research-based tech startup, but the atmosphere was a bit tense concerning the subject “investors”
The startup has developed world class technology. Strong patents are secured, the beta version is ready, the team consists of great R&D capacities – and 2,5 M EUR of soft funding have been raised and spent. Great stuff!
The company is now looking for ~1 M EUR in equity financing from business angels and/or venture capital. But after initial feedback from the investors, it is clear that the CEO faces some challenges:
- The “Technology Problem” is well documented and is the DNA of the startup. The problem is not quantified from a customer point of view. So we have a classic “technology looking for a business problem” situation
- The “cost of goods sold” is estimated at 40,000 EUR. However, this estimate is based on low founder salaries and does not include the actual costs of a production and supply chain setup – most likely the COGS will be closer to 50,000 EUR
- The sales price is expected at 60,000 EUR. The first customer is interested in the product, but is not convinced of the benefits and indicate a price of 5,000 EUR…so “build it and they shall come” has not worked
- The expected pricing does not allow for attractive margins for a future reseller/distributor, which is essential in order to scale
- The sales model is a one-off sales price, no “annual recurring revenue” has been discussed, this hurts the company’s valuation in the investor dialogue
- There are great competencies across the ownership, management and board within R&D, hardware, software, finance – but there is no commercial B2B sales experience involved. The business strategy has been allocated to a business school student working part time.
- The cash runway is 3 months, which leaves little time for investor negotiations
We agreed on some actions from the toolbox to be carried out in the following days:
🪛 Attract commercial expertise: Business professionals with relevant sales experience in this value chain will be scouted and contacted asap. Hopefully 1 or 2 can join the board asap on a warrant package.
⛏️ Customer “open book” interviews. Three potential customers will be offered attractive first mover advantages, if they help unlock the customer pain, the “real deal” pricing points, and the preferred business model
🔧 Pitching practice. The CEO will receive coaching in doing investor pitching. Q&A without the “Build it and they shall come” attitude 👍
🔑 Business model change. The words “recurring revenue” will be embraced as words not coined by the devil, but a sound and attractive tool that can create value for both the startup and its customers. Revisions will be made in slideware and budgets
That’s what we agreed on so far.