Smart strategy for B2B startups crossing the valley of death

Note to reader: I originally wrote this article just as COVID-19 started to change our lives. It was meant to be a helpful advice for B2B startups like ours, who look for creative ways to access growth capital. As investment flows continue to seize up, this approach may now be valuable even to those startups who hail from traditionally well-capitalized tech hubs.

The times in the start-up land are changing. After years of singular focus on revenue growth, both investors and startups are paying more attention to profitability (or at least to the idea of it). Blame it on the shock to the market or on several high-profile IPO fiascos in the last 6 months. But while growth is still a key measure of startup’s potential, this paradigm shift brought about by recent shocks to investment landscape is having fledgling companies scramble to find new paths to grow past the dreaded valley of death. If you are not familiar with the term, the valley of death is the period in startup’s life when it is not able to cover expenses while growing its revenue and slowly running out of cash.

While such scramble may be a new thing to many startups in the traditional, well-funded tech hubs, it is life as usual to frontier companies like ours, companies away from the tech investment centers. In his recent HBR article, Alex Lazarow nicely summarizes creative solutions that innovative startups from the high-tech frontier (i.e., outside of Silicon Valley, Boston or Tel-Aviv) use when facing the lack of access to funding or talent. Such companies must be extremely cash-efficient and often the first lesson they learn to bridge the aforementioned valley of death is to quickly make profits from the tech they develop.

One of such strategies I find particularly useful for B2B startups is providing tech enabled services. This may be traditionally considered to be a bad idea for fast-growing upstarts: tech startups are not supposed to be performing services for their customers. Services are labor intensive. They are not scalable. They have low margins. Service revenues are not predictable. Traditionally speaking, what startups should be doing with their cash is building products and ideally converting them to pre-paid annual subscriptions as fast as they can to prove said scalability, predictable revenue and high margins.

This blueprint for a successful tech startup certainly has its merits, particularly when your startup has a ton of cash to burn. But a frontier startup may not have such resources. A typical problem for B2B startups is selling large ticket items to conservative customers who are more likely to fear the consequences of a failure of your technology not delivering than get excited about its upside. When cash is plentiful, this risk can be mitigated by making your technology virtually (or actually) free. But I would argue that a smart strategy here on the frontier is to take the technology risk off the table by not selling the customer your cool tech, but rather selling them the job your tech does.

For illustration, let’s take a hypothetical example: imagine that you are in a widget-painting business and your tech can paint your customer’s widgets in one-tenth of the time compared to what it takes them today. Your customer loves this idea and the potential savings, but she is worried that your tech is too risky, it takes too long to train her staff to use it and there is nobody on-site to fix it if the tech breaks down. Moreover, should any of these bad things happen, she will miss her production deadline and her customer will start buying painted widgets from someone else. In a situation like this, there is no point to argue what awesome value your tech delivers. The only way this customer will ever try your tech is if you will paint those widgets for her. In exchange for taking the risk (and proving your tech), you also get to share a big chunk of the value you deliver as your profits.

This is why tech enabled service is in my opinion is a great solution to a problem many frontier start-ups are facing. It is a growth phase that allows your company to make a bet on your own technology, on your ability to scramble and deliver. My frontier startup has served our customers with our own tech from the very beginning. We did it not only to boost cash generation which we then use to improve our product. This approach also allowed us to have our eyes and ears close to the market and to learn first-hand what are the wows and uffs that our customers experience with our technology.

For frontier startups, creative solutions such as this may be one of few viable paths across the valley of death. Focusing on profits early on may sacrifice some speed of the journey, but it more than makes up for it by pointing the journey in the right direction. In my own experience, I believe that betting on themselves is the most optimal growth strategy a frontier startup could ever pursue.

Rasto Ivanic, Founder & CEO, GroupSolver