113. The Penny Gap

VC Minute
Why is the differentiation between pre-revenue and any revenue at all so important? The answer is from a classic startup post.

VC Minute – quick advice to help startup founders fundraise better.

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Why is the differentiation between pre-revenue and any revenue at all so important? This goes back to another classic startup post. This one from Josh Koppelman from First Round Capital, a post he wrote in 2007—16 years ago! And it is true today, as it was then. It’s called The Penny Gap

I’ll link to the article in the show notes, but I want to read this one quote for you, ” the biggest gap in any venture is that between a service that is free and one that costs a penny.” 

Think about this. If you were already collecting revenue, how did your business change once you started charging for your service? 

One of the things that I tell pre-revenue founders is, when you finally get someone to pay for your service, that is when the real feedback begins. They’ll pay you for it and then they’ll come back to you a little bit later and say, “this is cute what you’re offering me, but what I really need, is that over there.” 

This is why some funds have no appetite for pre-revenue or why other funds like SpringTime, for example, and many others, want to have other things in place to show that you truly understand the pain of the customer before you start charging. It makes a big difference if you know the industry, if you know the pain and you know you can go out and charge for it. And at least be within the target area so that pivoting is not going to be a major change, but a minor one. 

If you don’t know the industry and you’re not charging for the product, well, let me know what your customers say after you start charging . That’s when the real feedback begins. 

Keep in mind, the penny gap. If you haven’t crossed it yet, get across it as soon as possible.  

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