Why it’s critical to find early customers outside of Si

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Why it’s critical to find early customers outside of Silicon Valley

Above: San Francisco’s Dolores Park

Image Credit: Sean Ludwig/VentureBeat

Landing your first customer is hard. As a startup, you have to find someone who is willing to take a risk and place a bet on you so that you can prove that what you built works.

But sometimes in the quest for those elusive early customers, entrepreneurs in the Valley stick too close to home. One risk in that is what Benchmark partner Bill Gurley pointed out the other week — that the market here is overheated and taking on an excessive amount of
risk right now. In today’s market, it’s better to have a diverse customer base. I once asked Joe Payne, former CEO of Eloqua, how they survived the 2008 crash, and he attributed it to having a large customer base outside the Valley.

But the bigger issue I see in sticking close to home is that we miss the opportunity to have impact in the broader economy. And we miss the chance to put what we’ve built to the test in a potentially more rigorous environment that will, in the end, result in a superior product.

Sean Jacobsohn from Emergence Capital says Emergence specifically looks to fund companies that are solving a problem outside of the Valley: “Too often (a company’s) only customers are in the Bay Area, and they are friends of the founders, which means no proof of a real market.”

Pete Sonsini of NEA looks for companies that can
apply a great idea to a large market: “The Valley is a hot bed of great ideas, but for a variety of reasons, only a small percentage are actually realized. You have to be able to prove value beyond the buzz — beyond the Valley and into the mainstream — if you are going to succeed.”

Entrepreneur-turned-VC Jason Lemkin has written that an early marker of success is having 10 unaffiliated, paying customers. This means 10 customers that did not come to through investors, friends, family or past coworkers.

That’s also the premise behind Geoff Moore’s “Crossing the Chasm.” Success is crossing the chasm from the innovators and early adopters to the pragmatists who must be convinced why
the innovation is necessary: “With early adopters, it’s about giving people gain. Once you cross the chasm, it’s about pain. You’re solving a pain point. You know you’re across the chasm when your clients stop talking about gain and start talking about what pain you’re alleviating.”

Easier said than done. On the one hand, picking up customers quickly shows momentum, interest, and your skill at closing deals in what is often a land grab. The Valley likes that. And let’s face it, as technology companies we’re innovative and more open to trying speculative technologies than other industries because we’re in lean, competitive markets where every possible advantage counts.

But the reality is that what happens in the Valley sometimes stays just in the Valley. While finding customers locally the easier path — sales cycles are quicker and the companies are more forgiving of a not-quite-mature product if it shows promise — you’re only
getting good at solving a narrow problem. It’s a mistake to think that those early customers are emblematic of success.

It’s one thing if the purpose of your technology is to solve a common problem for emerging, high-growth tech companies. But if you are aiming to solve a broadly applicable business problem, it pays off to focus outside of your geographic boundaries, even if you have to sacrifice your growth rate in the short term.

Some Challenges Benefit from Being Solved Outside the Valley First

Take predictive analytics, one of the hot trends today. As you might suspect, high-growth companies here in the Bay Area have taken a cue from the consumer world and are rapidly adopting predictive technologies to improve how they run their businesses. There are some incredible innovators here doing this like Pure Storage, Nutanix, Citrix, DocuSign, FireEye, VMware, and dozens of others.

But the truth is, predictive analytics has been in use outside
of the Valley for at least five years. Some of the earliest adopters of our predictive applications for marketing and sales were actually companies like Dell, PC Connection, SunTrust Bank, and Staples. They have a similar set of challenges to emerging tech companies — it’s about growth, whether capitalizing on market opportunity or needing to find new growth. What’s different is that they keep a much closer eye on justifying returns on investment and are much less likely to dabble with a technology just because it is cool. And they have a high level of complexity, not to mention massive amounts of data.

Solving business challenges for companies with this scale and a diversity of needs early on results in a stronger product. You learn how to handle requirements like security and stability. You build a framework that enables you to handle nearly any challenge for companies of any size across different industries. And you know you are not in an echo chamber solving
the challenges of the one percent.

How to Build Validation Outside of the Valley

Start small — Our first customer was a large company based in Texas. We had been looking for a partner to try out our predictive analytics solution and found one in a small division of a Fortune 100 company.

Be willing to bet the farm — Once we got in the door, they wanted to do a real experiment to see if we could really deliver on what we claimed. The in-house data scientists didn’t believe it. We were confident, but we also didn’t really have a choice. They knew that they were our first customer. We set a goal that the control group using our technology would have to perform three percent better over six months in order for them to invest in us. The final results clocked north of 11 percent.

Be patient — It’s tempting to take the quick wins early on. But there’s nothing sweeter than winning that first true,
unaffiliated deal. It took us 15 months. Yes, 15 months. The rigor and measurement they put us through made us go back to the drawing board again and again, but because of that, our technology works better, and each deal after that was easier to win — including back at home in the Valley.

As a Valley company, we embody the fast growth, competitive spirit and aggressive camaraderie of the companies around us. We wouldn’t have it any other way. But I can tell you firsthand that by taking the long road early on and ensuring your product solves problems for a diverse set of companies and challenges, you open the floodgates to growth.

Shashi is the founder and CEO of Lattice Engines. He was previously a Cornell data scientist and a partner at McKinsey.