tech-company, funding, investors, venture-capital, b2bI’m co-founding a bootstrapped startup that will have both a free and a paid version of our product.
While we are not in need of more capital at the moment, we are investigating the possibilities to work with a VC to accelerate our growth.
Our project is Linkredirector, a dynamic URL shortener that targets marketeers and app developers. We are currently running in closed beta and right now we provide all features for free. The reason for this is to validate the need of the product and to get as much feedback as possible.
With a focus on B2B customers, would a high number of active users be a good indicator to a VC that there is a great need for our product, or would proof of paying customers be the most important goal to strive for?
The way I see it, we could either try to grow our free active user base and then monetize, or we could monetize early to try and get paying user base even if it is narrower.
I would be very interested to hear your opinion on this. Especially if you have similar experiences with VC from before when it comes to B2B.
I think it's safe to make the claim, "Cash is king!" And I just read this article that makes a pretty good case against the freemium model.
Few cloud startups are willing to admit that the top-line ship has already sailed. In a race to develop a sticky user base, everyone is giving away growing amounts of free storage. That’s not a vote of confidence for “land and expand.”
With a focus on B2B customers, would a high number of active users be a good indicator to a VC that there is a great need for our product, or would proof of paying customers be the most important goal to strive for?
Every VC has their own investment criteria, so whilst one might be looking for strong revenues another might prefer to see traction.
That said, by definition a VC participates in earlier-stage/higher-risk investments than more general PE investors—and therefore they tend to look (amongst other things) at projected customer lifetime value rather than the business’s current revenues, although that is of course a very sweeping statement to which there are many exceptions.
It’s probably best to focus on what is best for your business and then to find a VC who is prepared to invest on that basis, rather than structuring your business around the arbitrary criteria that some investors (with whom you have no connection) have identified as prerequisite for their particular portfolios.
Because you’re in a field that already has scale and history, including a high rate of fallers, my guess is that most VCs are going to be concerned first with evidence of what, why and when companies will pay for your services.
At this stage, you should be more concerned with the different but related questions of (i) how to create value for your users; (ii) how many potential users are out there . So there’s a possible tension.
My suggestion is that even at this stage you should choose a feature that you already have evidence is a clear benefit but not essential for every user and put a price tag on it. If it’s a feature that you haven’t yet implemented, your indicators will be about how users are expressing intent to acquire the feature, or if it is one you already have, then you can also measure actual sign-ups for people offered to add or retain the feature, to access a free trial, and all the other usual suspects.
All that is pretty general advice, which would apply to other markets where there’s history, where there are established players and where there has been high attrition of providers.
When I look at the specifics of your offering, I do have a concern over what you should be providing in your free tier. If links can be different for different people or at different times in more than the presently familiar way, there are some pretty obvious possibilities for abuse. So I think I’d be looking to have some kind of pre-established billing relationship with any user who has that available.
Does that mean you have to abandon the free tier? You’re bootstrapping, you’re in or on the edge of a commodity space, and you have lots to learn, so there’s value to you in free users. So I would be tempted to have your free service impose some tight restrictions - some or all of the following:
All target URLs must have the same root domain
All target URLs have a root domain on a white list of the main news, social media and content sites
Target URLs are frozen after x hours of initial creation
User accounts must have verified (by you or via a third party association) contact details
Good luck: I like the idea!
I don’t have a simple answer, but I think you should ask yourself, what you want to focus on. As mentioned in the other answers, every VC is different and has different preferences. Maybe the question would be good to answer with a potential VC. You get a feeling of the VC and his/her thoughts. A lot of free users, might give you some very valuable stats about your users. This could be a strategy, for revenue. As you also mention paid version, thats also a strategy. Personally I would prefer to make the choice with VC, instead of making it before. If you solve the question before finding the VC, then you have to go with the VC, with the same strategy in mind, as your choice. I think the real challenge is to find the best VC, rather than choosing between lots of free users or paying customers. When you have found the right VC, you take the decision together.
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