Archive for December, 2013

‘RAM’ could be your most important metric

This July, I moved back to Silicon Valley after living a year and working with startups in Helsinki (arguably Europe’s current ‘hottest startup capital’).  Between the move back and raising a new fund, I have had little time to post new  entries.  But after a catch-up coffee last week with a good friend who is a Founder-CEO, I felt the urge to write as our discussion reminded me of an important concept I feel every Founder needs to know…

Shahram Javey is the Founder of Aquacue Inc., and one of the most remarkable people I’ve had the privilege to work with.  I met Shahram a few years ago when Aquacue was tiny (4 engineers) and working out of Shahram’s Guest unit in his back yard.  A real ‘garage startup’.

I instantly liked what Shahram and his team were doing:  solving an interesting problem with an innovative software solution that had a payback measured in months.  However Aquacue had two challenges: the software had a hardware component; and the company was in the Water space (‘cleantech’).  Hm.

Nonetheless, I like the problem they were solving and the team, so I jumped in:  raised their series-A round, invested, and took a 18-month role as VP Business Development helping close their first, large deals.  They were acquired 24 months later at multiple from their first (and only) priced round.  Nice.

Shahram and I were reminiscing about the ‘good old days’ of cold calling new customers, scrambling to fix field units, saving Stanford University from a massive water leak (that could have run to a million dollars or more), and visiting 26 VCs (25 passed and missed a good exit).  While this may sound fun, let me be clear: those days were tough.  The team had to fight hard for every customer order and every dollar of venture capital.

That being said, Aquacue possessed something rare and valuable:  delighted, early customers that were motivated to test the product, use it, buy it – and buy again.  This provided a source of validation for new customers, credibility for the investors and confidence for the Founders.

Having early, fast customers is so important to a startup that I am going to create a new acronym:  ‘RAM’.

‘What the heck is RAM’?

You are familiar with TAM (Total Available Market), SAM (Serviceable Available Market) and SOM (Serviceable Obtainable Market).  Simply put, TAM is the total product category (example:  ‘footwear’).  SAM is the sub-category in which you compete (example:  ‘running shoes’).  And SOM is the market you can realistically serve, given your resources, location and product attributes (example: ‘upper income, general fitness runners in the Western US’).

But here is the problem:  early startups don’t need TAM, SAM and SOM.  They need their first 10 customers.  Then the next 10.   And the next 20 after that.  Quickly securing these customers is more important than calculating TAM, SAM and SOM.  These markets will be important later – just not right now.  Why?

It comes down to speed.  Speed is a critical advantage for startups:  planning fast, developing fast, executing fast, selling fast and yes, even failing fast.  Speed is one of the key attributes that separate a startup from an established business.  And it needs to be embedded everywhere:  how you operate.  How you make decisions.  And your first customers need to be fast, too.

As an early startup, you need fast customers.  I call them your ‘Rapid Adopter Market’ or RAM.  These customers will rapidly test, buy, critique, adopt, and rave about your product.  They are important for a small, unproven startup because they create the momentum and leverage that leads to scale.  Rapid adopters provide credibility (quickly), market validation (quickly) and will even fail you quickly – which is also a good thing.

How do you find rapid adopters?  Carefully.  Some may appear to be rapid adopters, talk about a great need for your product, their large budgets and the resources they will provide to get your product tested.  But inevitably something fails:  the review cycle takes months not days; the purchase sign off disappears into the ‘IN Folder’ of a finance exec; the testing goes on and on and on, and the AE is darn slow to respond.

You need to have a sixth sense to filter these customers out and find those who are serious and who move fast.   Perhaps a simple question can be: “who needs this yesterday?”

So the next time you are pitching to a VC and she asks about your TAM, SAM & SOM, go ahead and say that you don’t care – for now.  Tell her you are focusing on RAM because you believe finding early, fast customers is your single most important objective.

Back to the coffee shop with Shahram…  We chatted how life is different post-acquisition.  Certainly, there is no longer a ‘startup aura’ around the team, product and vision.  They are now part of a large, successful company and have capital, confidence and corporate commitment.  But we also reminisced about how strong a friendship was created through this startup experience, and how it will last for years.  Do we both miss those scary, sleep-deprived, anxiety-inducing days as a startup?

You bet we do.

Good selling.

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Steve Blank

Entrepreneurship and Innovation

Silicon Valley is a state of mind...