The beta: Its value to the startup, customer and investor
One of the most important things that a startup can do is find a good group of beta customers. Good beta customers have some key characteristics. In some ways it is like Corinthians 13:
Beta customer is patient, beta customer is kind. Beta customer does not envy, beta customer does not boast, it is not proud. Beta customer does not dishonor others, it is not self-seeking, it is not easily angered, it keeps no record of wrongs. Beta customer does not delight in evil but rejoices with the truth. Beta Customer always protects, always trusts, always hopes, always perseveres.
Okay, maybe that is a little rich. Beta customers are startups first and often most loyal customers. These are the customers that validate the problem is real and the solution is awesome. And if it is not, these are the customers that will provide you the feedback and necessary tough love to make sure your product is better for them than you ever thought it could be. And that is why it is so important to leverage them.
Key themes to a good beta relationship: consistency, communication, openness and professionalism.
A startup needs to provide consistent access to beta customers, allowing them to fully utilize and experience the beta without constant down time or reliability issues. You cannot expect a customer to love you when they cannot depend or trust that you will be available when needed. So for example, if your company is a SaaS solution, then your beta's need to have 100 percent confidence that even though the features aren't right yet – the product will be available when they want it with all of its imperfections. Without this, the customer cannot and will not integrate the solution into its primary work flow, work engine, process, etc.
Establishing a regular means for communicating about the product is critical. Points of contact for the relationship on both sides are important. And the startup should establish a regular feedback loop with the point of contact – a Friday afternoon phone call every week or two weeks. This ensures that both harsh criticism and passing ideas can be exchanged both ways and validated. For example, recently in a conversation with a beta customer for Beehive, the customer suggested a flexible input engine for entries. We were in the process of adding this in our next release – but it gave us an excellent opportunity to affirm our commitment to the customer, listen to possible suggestions and affirm that we were on the right path. This was a 40 second part of our conversation – but only possible if you are communicating.
Laying the groundwork for trust and openness is really difficult in any relationship. With a startup company, there is already a question mark in the relationship – can the startup deliver and will it be around? Confront this head on and explain how important the relationship is to the startup and why it illustrates the company's long term sustainability. It also lays the ground work for being able to ask dumb questions or secretly smart ones that the startup thought were dumb.
The startup needs to get paid and establish itself as a professional entity that has specific expertise and expectations. This means that the company should not accept being pushed to the bottom of the priority list but should not create an environment where the startup undervalues itself by accepting poor treatment. A good customer will understand the startup's value but affirming this value with professionalism is critical. Be on time to appointments. Have a regular communication schedule. And act as if the customer is both the most important one and that you have been there before. It is like scoring a touchdown in a big game. Act like it is important – be proud. But act like you have been there before. This professionalism helps get you the next client and establishes your pattern for interactions for the next decade with your customer.
Being a beta customer can help a company in innumerable ways. Here's three:
First to move
In some instances being the first to move on a beta opportunity gives a company the opportunity to leap over competitors and establish themselves in a better position. For example, in the insurance world, Bob Bates (formerly of Lincoln Financial, ne Jefferson Pilot, ne Guarantee Mutual Life) describes how changing their technology stack allowed them to enter group products and cut a huge chunk of cost from their process. When he left the company five years ago, the company still had a huge cost advantage thanks to the advent of new technologies and processes. – for more information 2006 Northwestern Kellogg School Case Guarantee Mutual – written by Anne Coughlan and Richard Kolsky – as told at the ACG Nebraska March meeting
Excite your people
Individual actors at a business want to be on the cutting edge. Very few want to go to work and do the same thing every day. While many want the stability and certainty associated with a large company job, most still want new, dynamic opportunities to do their job better and in a more advanced way. Leveraging and exciting talent is a key benefit to working with scrappy startups. Very large multinational companies are constantly trying to unleash innovative intrapreneurs and one very effective way to provide that model is to have regular and consistent interaction with entrepreneurs challenging the boundaries of the large company’s business or process.
Help your community/help yourself
Having vibrant startups in your area matters. It matters because it helps a company indirectly recruit personnel and it can be a compelling place for a company to poach key people. For example, Bob Beck, CIO of TD Ameritrade was part of Vente, a venture-backed startup in the early 2000s. More than just helping yourself through personnel accretion, helping your community can provide direct benefits to your bottom line. Successful startups treat beta customers well – with discounts, preferred treatment, potentially equity and other perks. These can be particularly valuable when they either directly impact the bottom line or when the company becomes a big deal. So, for example, preferred rates at Phenomblue or at Contemporary Analysis because of early adoption have become really valuable. These are top flight companies that being an early adopter and beta pays direct savings and benefits. Moreover, while there may have been growing pains, you have also benefitted from the product/service during its growth phase.
Beta customers have value for a couple of key reasons for an investor.
First, in a paid beta relationship, customers are actually providing revenue to the company. This does two things. It ensures that the investment and the burn associated with the build are slowed (at least a little). Also, it helps create the processes associated with payment – purchase orders, bills, invoices, accounting on receivables, etc.
Second, a paid beta relationship both validates the market and the company's positioning. In a situation where an investor is concerned about the price of a product, having the ability to respond as an entrepreneur that I have three beta customers paying that price is hugely validating. Typically, the relationship extends beyond this price because the customer is willing to participate with the bumps, and this means that questions about pricing, value and appropriate structure are all things that can be part of the original relationship. So, for example, in our example with Company A as the beta customer, a conversation about terms and appropriate contract concerns can be a critical learning point. In the case of companies selling to government entities, this may identify grant or budget deadlines. In the case of a company selling to advertising or marketing companies, it may reveal the need to nail quarter four.
Nailing the positioning goes beyond validation and extends to the point where having a customer actually validates that the marketing and sales efforts are correct. We said that our customers would be X, that they would buy at Y price, that the sales cycle would take 6 weeks, etc. – and here is our proof.
Third, investors like beta customers because it makes things real. Most entrepreneurs have ideas until they have customers, then they have responsibilities. Understanding and delivering on those responsibilities becomes critical and illustrates to an investor the type of entrepreneur that is being considered. Moreover, pricing is real (and can be modeled). Go to market strategy is real (and can be extrapolated). Technology is in play and can be stress tested beyond QA.
In other words, the kinks in the armor will show during beta tests. This is good for all parties and ensures that everyone understands the risks, rewards and responsibilities.
Credits: Photo of Tom Chapman courtesy of Chapman.
About the author: Tom Chapman is the vice president of operations at Nebraska Global, a software investment firm based in Lincoln, Neb. The firm specializes in developing complex software companies that can create real, lasting economic development impact in Nebraska and the region. Chapman’s role is to help with deal diligence, business, corporate and strategic development and acting on behalf of Nebraska Global in the broader entrepreneurship and innovation community. Formerly, Chapman was with the Greater Omaha Chamber of Commerce where he had the role of senior director of entrepreneurship and innovation.
Find Chapman on Twitter, @tchap623.