TLDR; Revenue streams for startups can (should) evolve over time, consultancy is a very valid starting point.

Last week, I was helping out with an investor pitch for a SaaS startup, and when we’d got to the end of the deck, the investor asked the following question:

“This all looks great, but our experience is that in this market, it takes a lot of hand holding and support before customers commit. How are you going to survive these long, expensive trial periods before you get to real revenue?”

It’s a good, and perfectly reasonable question, and fortunately, I had an equally good answer based on my own startup experiences.

“Basically, we turn what appears to be a burden into an opportunity. In my experience, customers are willing to pay for some consultancy in order to get going with a product or service under two conditions.

One is that they are offered a concrete result as the output, such as putting a better UI on your app in a week. The second is that the commitment is below what is a discretionary spend for that customer, say < 5K.”

Now, this was not a theory in my case. Many years ago, I built a tool for transforming green screen applications to GUI’s, and we discovered that a few days of consultancy with a definite outcome would speed up adoption enormously. Customers would be willing to take the punt on a clear benefit for an acceptably low cost. Even better, the support team became a profit line item not a cost item. Indeed, it did take a long time for the product to ramp up to significant sales, however, the consultancy and subsequent project work handsomely made up for that in the short and medium term.

Another part of the psychology of SaaS/Tools customers, is that although they are keen to be able to create their own solutions with a tool, independent of the vendor, once they feel comfortable that they can, they are often very happy to pay for project work.

Now, “consultancy” rarely appears as a revenue stream in startup business plans, and I think that this is mainly because of objections from venture capitalists that it “doesn’t scale” and doesn’t fit in with the extreme growth expectations of VC funded startups. To a certain extent this objection is valid, but it ignores that fact that the balance between consultancy and product sales will naturally change over time, until product predominates and allows for high revenue growth. Also, there is no quicker way to improve your product and it’s market fit than to have your staff directly working with customers and understanding their needs and how the product can fit them better.

Obviously, the trick is to set up your support offering in such a way that customers will go for it, and I wouldn’t minimize that challenge, but it’s really worth the effort, and it can reduce the overall cash requirement for your business plan drastically, as well as keeping you really focussed on customer needs. Also, drastic pivoting is much less likely if you have a constant stream of information about what the market really wants.

It’s great to shoot for the moon, but it’s getting off the ground that counts most.