The 1st Dollar Rule
July 20, 2010
–> Most successful early stage businesses have an anchor paying customer and have built a trust relationship with this customer. Getting to a trust relationship with an initial sponsor is key.
Ever been to a restaurant, dry cleaner, etc. and seen a plaque with a $1 bill inside signifying the 1st dollar of revenue that the business received? At first glance this can seem rather ridiculous, but just think how much work went into earning this first dollar.
It would be interesting to chart out the evolution of a business idea and what percentage of ideas transform into a business plan, the % of business plans that result a built product, and what % of these products get to a point where a customer is willing to pay for the product.
I bet it would look something like this.
Most ideas are forgotten or fail before any sort of business plan is developed – this is obvious. The less obvious point here is that many businesses build products and fail before they achieve $1 in revenue. They often give the product away for free with the hope that these free users evolve into paid users. I am not saying that this “free for now” strategy is always wrong, but the key point here is that most successful businesses have developed a key relationship with a customer that is willing to pay for the product.
This customer helps the startup in many ways. Since what the customer needs is not usually what the entrepreneur thinks the customer needs, this initial sponsor can help develop the key value drivers that future customers will desire. This sponsor can evangelize the business to other potential customers in the industry, help with reference calls for prospective customers, and provide real revenue to the business. A business with some revenue traction also looks much more credible to an investor and will often result in a premium valuation relative to a pre-revenue company.
