How to Prove Your Business is Valuable Before Generating Revenue
When evaluating pre-seed startups with little to no revenue, the ‘Crossbeam process’ entails reverse-engineering characteristics of a ‘good business’ and trying to back into early indicators. Here are five common factors we focus on:
Utilization data (churn, product extension): if end-users on a b2b platform are logging in multiple times a day, or time in-session and the number of clicks are increasing – even if the revenue isn’t there yet, you can underwrite the probability of low churn and/or product extension.
High levels of usage = product-market fit
This is the most powerful one we work with founders on. Tools like Hot Jar (no affiliation) can make it easy to pull this data.
Position in value chain relative to costs (pricing power): pricing power is strongest when a tool is demonstrably mission-critical, but only takes up a small percentage of overall spend. If the number of times your product is used in a day / week increases over time (progression is key), this becomes even more compelling. Not only can you gain confidence in your gross margins, but also likely has secondary effects on runway for revenue or market size.
Ability to intercept the exact moment demand kicks in (ability to grow quickly): if customers have a specific time they face the pain point, and you have one or two ways to observe that and reach them with an effective solution, it becomes easier to bet on rapid growth. Side note: when it comes to aligning on growth expectations, this recent Jason Lemkin tweet is helpful.
Imperfect comparables that signal adoption or monetization (TAM expansion): if businesses or users are relying on a makeshift solution, showing how they stick with it despite hurdles can validate untapped demand for the product (e.g. people using Craigslist before Airbnb). Similarly, if a comparable business model is monetizing businesses or users at $X per year, you can build a case for achieving a fraction of that early on, with structural reasons as to why your product can match or exceed these numbers over time. Note 'imperfect' comparables are often more compelling, as obvious opportunities may have already been exploited or arbitraged away.
GTM velocity relative to burn (potential for high ROIC): if you can prove that you achieved certain GTM milestones (e.g. shortening cycles from demo to trial periods, word of mouth driving pipeline) while burning minimal cash, you can create an operating model where small investments can lead to outsized results over time.
While we highlighted a few here, additional drivers can also indicate a strong business foundation, including founder track record / market fit, strategic partnerships, proof of a growing market and/or operating in a niche with limited competition to name a few. The problem, however, is many of these are fleeting or difficult to observe/quantify. In contrast, it’s hard to argue against clear data that show users are logging on, spending x minutes and/or finishing y ‘jobs’ on a given platform. Once you generate revenue, you can layer on more traditional metrics such as payback periods, retention/expansion, and margin profile over time.
Ultimately, when you’re super early, it’s crucial to highlight various forms of leading indicators that show your business is being built on a strong foundation. By providing clear, measurable metrics of value, you’ll help investors get to a “yes” quicker and with more conviction.
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