Hope you enjoy the 6th installment in this series! (No voiceover today due to poor audio quality). Now, here is this episode!

Once upon a time, I met a startup team.

Tim was the founder and CEO of XYZ Company. The startup broadly played in the healthcare space. The startup possessed an intriguing piece of novelty and IP that, if proved out, would have a completely new way of thinking about this aspect of healthcare. The model was B2B2C. XYZ Company sold a product to the corporation (the “2B) which would activate its employees (the “2C”).

XYZ Company had generated revenue and had been running for a few years. Tim came to me looking to raise a bridge round of capital.

As I and Tundra Angels progressed in our conversations with Tim, some dynamics appeared that made us question the opportunity.

At the outset, I really liked the potential of the IP. So I asked probing questions about technical aspects of the IP. As I asked more specifics about the intricacies about why it worked this way and what else could be shown, I observed something curious - Tim kept staying at same surface-level of depth when he was explaining the IP. Once or twice, he re-framed the same explanation in a metaphor as if to enhance my understanding. But none of this was answering the deeper questions that I was seeking.

Tim finally conceded, “I’ll have to bring my inventor onto a call and we can chat more specifics.”

Technical experts are part of startups. But the proposal about bringing in the technical expert after Tim had unsuccessfully answered deeper questions gave me the impression that Tim, as the CEO, didn’t understand the technical aspect of the technology. I didn’t expect Tim to answer me in scientific terms. But I also expected him to be able to answer business implications of the technology.

As we progressed in conversations, Tim kept on bringing up the same 3-5 potential customer names over and over again in our conversations. These customers were major enterprise customers. One particular customer, call it Customer X, was very close to signing a customer contract. One contract could potentially have meant millions in revenue for XYZ Company.

Now, there is an alluring nature of a startup courting major enterprise customers. And yet…

✅ Startups need two things to be successful with major enterprise customers:

Something was not in Tim’s favor - XYZ Company didn’t have either time nor money.

XYZ Company was raising a bridge round in order to extend runway so that the sales cycle could play out and the company could start generating meaningful revenue. Tim needed money to put more time on the clock to endure the sales cycles, but he still only had 3-5 customers in meaningful discussion.

In bringing this point up to Tim, his counter-response was that, “If we screw up Customer X, then not of these other industry companies that look to Customer X for reference will bring us in.”

Although he had a point, any startup can only grow either:

✅ Sales is a numbers game. Startups should always be putting potential customers in the top of the funnel.

It’s not just about growing fast. It’s also about diversification risk for the countless “no's” that the startup receives as well as to hedge against the customer deals that you lose that you thought you’d win. ✅

By focusing on a few potential customers, Tim didn’t hedge against diversification risk.

Seeing the diversification risk at play, our Tundra Angels diligence team noted the importance of diversifying revenue.

In one of our due diligence deep dive chats, one of our investors, who leads a software development firm, suggested a fantastic idea. This investor observed that the delivery model of the B2B2C motion was nearly the same as a B2C model. Yet, the B2C model would have far less friction in getting to market. In fact, the investor said, “If this was B2C, I would buy the product right now and I could send this to five other people who would buy right now.” This was quite a statement considering that the product sold for, say $200 (one-time). Thus, cash could be generated at a decent clip if even 20 of these were sold in the next month.

The investor further recommended that Tim doesn’t turn off the B2B2C, but rather activate the B2C motion in parallel. I, along with the other investors, thought this was a terrific idea.

Yet was clear that Tim didn’t see it the same way. In an email, Tim asserted:

Tim: “I’ve run experiments on that and there is far too much to convey in an email. But my biggest learning is that fracturing my focus to try and do both right now is probably the fastest and most surefire way to kill the business. My long term goal is to have both a B2C and B2B team in XYZ Company. One step at a time.”

I didn’t like that answer on a few levels.

First, Tim and XYZ Company needed cash. The B2C motion represented a way to get cash in the door quickly, to at least get the company’s financial legs under itself. There was no telling how long the roller coaster of Customer X’s sales cycle would be.

Forgoing the B2C motion, when there are valid customers on the hook, seemed like a bad business decision in the short term. It may not have been the best long-term play, but at least sell 20+ products B2C, get some cash cusion for a few months, and then you have more breathing room.

Secondly, Tim shut down this option completely. This itself was a vantage point into the coach-ability and mindset of the founder.

Tim could have said, “That’s a great idea to do the B2C, but I don’t have the resources for that. Will you help me?” The investor even positioned himself as willing to be helpful to make it happen. But Tim signaled that he knew what was best for the business, even though help was being extended. Another bad business decision.

✅ Startups may make decisions to generate cash in the short-term that might not make sense in the long-term. But if the survival of the business is at stake, those short-term decisions make the long-term even feasible. ✅

As conversations continued, the plot began to twist. Through our due diligence, we asked about pricing of the product.

XYZ Company charged $200 for the product. As we looked closer, XYZ Company was literally charging the near-exact same amount of money as their costs. In essence, they were going to break even on this major enterprise customer contract with Customer X once they signed!

Between email and the Zoom call, some strange behavior started to emerge.

I asked about this unit economics in an email, Tim indicated that they have “found markets willing to pay $400.” (double the price)

That was odd. Then why aren’t they charging $400 per person here?

I had a follow up Zoom call to understand this more. If we extrapolate this, he was fundraising was because he wasn’t generating any cash for the business due to his poor pricing decision!

So the logic could follow that we as potential investors, if we chose to invest, would essentially be bailing Tim out of a poor business decision.

On the Zoom call, Tim revealed that Tim told me that they could charge $700 per person. This was the first time I heard the $700 price point mentioned.

In the span of a few days, we went from Tim charging $200 per customer to saying that he could charge $700, but clearly wasn’t.

Two things concerned me here:

Why Tim wasn’t charging at least $400 off the gate.

Secondly, in this conversation, I sensed that Tim was getting desperate for investment. His about-face into his stated ability to charge $700 came off as saying something that he thought that I wanted to hear.

This really just dug Tim deeper into the hole that he had already dug - that he clearly didn’t have much of a grasp on the fundamental details of his company.

We had seen and heard enough to pass with clear conviction. I developed a very thoughtful note because I did want to be helpful to Tim.

I sent a note saying in part, the below:

“[The companies in your target market] literally have no solution that they are currently using to solve this problem. To say they are desperate is vastly understated. XYZ Company should be charging a hefty premium to engage Customer X and Customer Y (a company in the same industry). I don't understand why XYZ Company is not making a tremendous profit in these two deals. XYZ Company isn't doing anybody a favor. There is no room for introductory pricing here. XYZ Company needs to generate lots of cash here and command the value that the results prove it can bring. Otherwise, it will never get itself out of the vicious cash flow cycle that it is currently in.”

Several days later, I received a response from Tim. His response called out stats, pricing numbers, and details of the contract that Tim had never brought up. It was a Hail Mary pass email. That only led to further confirm out decision.

I responded with,

“Thanks for the email here. I appreciate you explaining. Although admittedly I am quite confused because you're referencing facts and numbers that were never previously referenced. 

At this point, we are a firm pass at this time. The investors who were originally interested no longer are due to the unfavorable numbers in our email exchange. Additionally, we are uncomfortable with the discrepancies in the numbers. That's where we stand. 

I wish you the best and hope you have a great weekend.”

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