“That sounds like death by one thousand cuts,” Rob, the VC I was pitching to said to me.
I had just told Rob that the average customer would buy $10,000 per year of our products and that the average product would sell $700,000 per year. I knew, by Rob’s response, that he was worried about our customer acquisition costs.
So, I wasn’t rattled by Rob’s concern. Instead, it just indicated to me that I needed to give more detail about the dynamics of how our business worked.
I asked Rob, “Do you know what our sales acquisition costs are?”
Rob shook his head.
“Zero,” I said. “Most of our customers buy from us without any sales visits. That’s true for even our large customers.”
“What about your marketing costs?” Rob asked.
“Great question,” I said. “We currently spend $771 to acquire a customer. And with our gross margins being well over 60%, as our business scales, we’ll turn into a cash machine.”
“Okay, I get it,” Rob said. “That’s very cool. But how do you grow if you only do $700,000 per product?”
You have to make extremely high quality products if your startup is going to win.
“None of this is going to be a surprise to you, but product selection is key in our model. We know, from our experience over the last twenty years of doing this, that the products that win offer significantly more value than what is in the market.”
“How significant?” Rob asked.
“It has to be at least 10X to 100X better than what’s out there today to cut above the noise,” I said. I then gave Rob a demo of our newest product, explaining why it was better than the competition.”
“How many products have you announced to date?” Rob asked.
“Fifty two,” I said.
“Can you give me an example of a product that didn’t do well?”
“That’s a great question,” I said. “Yes, our first product didn’t do well. Let me explain why. It was a good product, and it improved on what was available in the market, but it didn’t improve enough, so the product didn’t sell that well.”
Your business model and the market is going to drive how many products you need to announce.
“So, for you to grow,” Rob said, “you have to introduce more products each year.”
“Yes. Here’s the way we think about it,” I said. “Each mask set we develop has to generate $3.5 million of revenue for five years. That means we have to introduce five products per mask set.”
“Five years? That seems long,” Rob said.
“That’s the beauty of the analog IC business. We’re modeling five years of peak revenue, but, historically, products in our world will sell for ten years or more. So it’s like a SaaS recurring revenue model.”
“Is there really a need for so many products?” Rob asked.
“There’s more opportunities than there are engineers to develop those products,” I said. “So, there are two keys for us.
“The first thing is to be able to hire and retain great engineers which we’ve been able to do. The second thing is to be able to identify great opportunities. We currently have a backlog of ideas, so we get to cherry pick the best ones.”
It doesn’t matter how many products you introduce if they’re not high quality.
Rob ended up investing in our company. He told me he invested because he loved our business model, and we had the team to pull it off.
The quality of what you do always comes first. By the time we met Rob, we had a growing customer base and growing revenue too. It was clear our model was working.
However, it’s one thing to have a paper business model, it’s another thing to have actual results. The results were due to the quality of what we were doing. Then, we were able to repeat the results again and again.
But make no mistake, the quality of what we were doing came first. If we kept introducing crappy products to the market, we wouldn’t have gained any traction. Instead, we would have quickly died.