Practical Funding

Choose customer funding before outside investor funding

I talked to over 10 early-stage software startup founders in the last week about their next funding rounds and all the options.

They think growth funding is “getting investment from outside investors,” but the first funding option for these founders should be customer funding–generating cash from paying customers.

Here’s why customer funding (revenue) should be the default fund-your-growth option before additional funding from outside investors:

1) $1M in cash generated from sales can fund the same expenses and investments as $1M in outside funding, but you are much further along in your business.

Founders should be thinking, “I need $2M in customer funding and $1M in outside funding = $3M to get to our next growth stage.” Too often founders are thinking of revenue as just a means to get more funding. That’s backwards.

Customer funding first!

2) More revenue is a valuation multiplier for outside investors, especially in the world between no MRR yet and $50K MRR.

Pre-revenue companies are worth a lot less than $1M ARR companies. The more real revenue you have, the more your company is worth and the easier it is to raise a little funding.

Pre-revenue funding is thankless and inefficient, if not impossible, for most founders. Funding after $1M ARR seems easy by comparison.

Why wouldn’t you focus on customer revenues and ignore the funding game until you have enough revenues to make it interesting for everyone?

3) Customer and revenue growth are the actual game of your business. Outside funding is just fuel and a little credibility; it’s not the game.

Outside funding takes a surprising amount of effort from the CEO. It’s a full-time job (one of several) if you are raising more than $5M from institutional investors.

4) It would be more useful for software and SaaS startup founders to think of funding your much-needed expenses through customer revenues as the default, versus something that follows after you have funding.

It’s great DNA for the business, investors love customer+revenue-first founders, and the more you sell the more you can spend!

5) When you get great at efficient customer funding and steady growth, you can procrastinate outside funding forever. The big prize is all yours.

The #1 thing that hundreds of founders who took big VC investment early have told me in the last 10 years is this:

“I wish I would have focused on customers and revenue more than funding in the early years. It would have turned out completely differently.”

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