The Real Value In Your Early Adopters May Not Be Measured In Revenue



If you passed the simple test in my last post for determining if you’re ready to start pitching your FinTech product to customers, you now have a new question to answer: what do you want to get from these first users?

Few startups explicitly ask themselves this question—but they could be missing an important opportunity to impact both their short-term and long-term growth trajectories.   

Don’t Fall Into The Revenue Trap—Your Early Adopters Can Offer You So Much More

I’ve observed that first-time founders with institutional finance backgrounds tend to consider revenue generation their startup’s primary goal, even at the early adoption stage. This is probably because they’ve been engrossed in an industry that evaluates companies in terms of multiples and ratios based on cash flows. Those are, of course, very important metrics to a more mature tech company, but they are only a piece of the puzzle at the early adoption stage.

Your first customers can give you many other things that, at this stage, can prove even more valuable than revenue. Each of these items act as a catalyst in unlocking the value of your startup over time, and the most important catalysts in addition to revenue include:1

    1. Legitimacy: this can be created through reference customers, a track record, and/or customer case studies. (These are useful for sales and marketing purposes and/or for raising capital)
    2. Evangelism: in the form of viral or word-of-mouth marketing driven by your users. (This can occur across multiple organizations/individuals or between groups within a larger institution)
    3. User engagement data, which you can use for: (a) Testing the adoption of current features and prioritizing your product roadmap of new features (since early adopters are a much less biased group of users than beta testers or your own employees/friends) and (b) raising capital by demonstrating traction and smart, data-driven management
    4. User density: certain products, particularly those relying on network effects, require a minimum number of active users to have any utility at al

To be clear, I’m not suggesting that revenue is simply unimportant or that you have no choice but to completely forgo revenue in favor of these other catalysts. Revenue can certainly be a component of what you obtain from early adopters, as long as you don’t sacrifice the other catalysts that you need. But all too often I see companies overly focused on it too soon and in ways that stunt their long-term potential.

To help mitigate this issue, you have two important tasks: 1) determine what catalysts are most important to your firm and 2) ensure your firm has the proper resources in place to capture and exploit them.

The relative importance of each of these catalysts depends on your firm’s situation, but where I most often see startups stumble in their prioritization of these is in focusing too much on short-term revenue opportunities at the expense of building long-term company value. The growth story of Estimize provides an excellent example of this tradeoff, which I will discuss below.

Another common misstep made by startups is not setting themselves up to succeed in capturing and exploiting the catalysts that are most important to them. Not only do you need to focus your team on capturing these, but you also need to make sure your team has the right capabilities to do so. I’ll discuss various issues with putting your chosen strategy into action later on as well.

FinTech Investors: Don’t Make This Same Mistake

FinTech angel investors with institutional finance backgrounds often make the same misstep. “How much revenue does the company have?” and “what’s the revenue model?” are the most frequently asked questions, but rarely do these angel investors ask even a single question about these other catalysts, or what the company’s plans are to extract them.

Unfortunately, this can be a catch-22 for FinTech startups. Potential investors ask about revenue, so startups feel the need to chase revenue, even if it’s not what’s most valuable at the time. I therefore encourage investors to take a broader approach to how they evaluate businesses at this stage by diving deeper into these other catalysts.

Short-term Revenue Opportunities Might Actually Hurt Your Long-term Growth

Estimize is a rising star in the FinTech scene, and a key factor in this team’s success is that they have been smart about prioritizing their opportunities.

If you’re not familiar with the company, Estimize is an open platform for crowdsourcing revenue and EPS estimates for stocks. Since its founding three years ago, Estimize has focused its efforts on building the most valuable aspect of its business first: its community of contributors. The Estimize team chose to make the platform freely open to all users through the website (though Estimize has been charging for a “fire hose” API feed of its data all along). This was done intentionally in order to maximize the rate of early adoption.


But like most startups, the team asked themselves many times when they should increase their revenue generation efforts. They had numerous opportunities to build premium features that would have generated additional short-term revenue by appealing to a small segment of their existing members. But instead, they took the path towards creating long-term value by directing their resources to activities like building a content-driven viral marketing operation and features that integrated their no-cost content into platforms like Bloomberg, where they could reach a much wider audience of high-quality potential customers.


The positive results of this strategy for Estimize have been:

    1. Speed: Not charging for access allowed its user base to grow much more rapidly, as did focusing internal resources on tackling large user growth opportunities rather than small revenue opportunities.
    2. Asset value: The rapid growth of contributors to its dataset has made the dataset substantially more valuable to both customers and the company.
    3. Defensibility: The rapid growth has also created defensibility, since this dataset becomes increasingly difficult to replicate as the number of contributors to it grows.
    4. Valuation: The combination of the three factors above led to a 4x increase in valuation between its last two venture financing rounds.


Now Estimize is in a stronger position for developing much larger revenue opportunities than before.


This low-revenue/high-growth strategy is not right for every business, but not considering it as an option could handicap your business much more than you realize.

Which Catalysts From My Early Adopters Are Most Important To My Startup?


The answer to this question is highly subjective, since it depends on your company’s unique situation. If you have a FinTech startup in this position, my partners and I at ValueStream Labs would be happy to discuss your particular circumstances with you.

But as a starting point, it’s helpful to ask yourself these three questions:

    1. What do I want my sales pitch to be in 6-12 months?
    2. What do I want my investor pitch to be in 6-12 months?
    3. Of the things that I can get from my customers right now, what is going to contribute to making my company most valuable in 5-10 years?


Crafting a compelling answer to the first question is not just about describing the benefits of your product to a potential customer. At the early adoption phase, prospective customers will most often be weary of the adoption risk inherent in using something new, and therefore the best sales pitches tend to focus on establishing legitimacy through real-life, concrete examples. Early adopters are put at ease when they hear things like: “we have 100 users in your industry who are already hooked on our product, using it 3 times per day on average” or “two of your largest peers have already deployed our product and have seen a 25% decrease in operating costs in just 6 months”.


How you answer the second question is often similar to the first, because sophisticated early-stage investors will be looking for you to demonstrate strong customer adoption with data. If you can demonstrate a customer’s willingness to pay for your product, that’s great. However, this is only one component of an investor pitch at this stage, and depending on your company’s unique situation, it may take a backseat to the more intangible catalysts. This is particular true with some of the FinTech products I’ve seen that are attempting to disrupt an incumbent that is highly entrenched in an existing workflow. An investor will have a hard time getting comfortable until they’ve seen real users choosing your product over the incumbent, even if it is just in terms of share of usage and not share of wallet.


Answering the final question is difficult because the future is littered with unknowns, particular at this stage of your firm’s growth. You may need to adjust your strategy multiple times over the next five years as a result of new competitors, regulations, or technologies, or many other factors beyond your control. However, the Estimize example above is a great example of how a company has built its strategy around capturing the catalysts from early adopters that will maximize the company’s long-term value. The answer may not be so clear-cut for your firm, but I encourage you to give it serious thought nonetheless.


(Also note that I chose the time periods in these questions arbitrarily, and so you can adjust them for your own specific preferences. For example, if you want to exit your business no later than 2 years from today, the 5-to-10 year timeframe won’t be relevant to you.)


Now Put It Into Action


It’s not enough just to know which catalysts will unlock the most value­—you have to design your activities around capturing and exploiting these catalysts. Everything you do, from the design of your UX, to your sales/marketing materials, to how you prioritize your product roadmap, to how you incentivize your team should be aligned with capturing the right catalysts from your first customers. There are a few important steps to take in putting this into action:

    1. Make these goals clear to everyone in your organization. For example, if you know that a certain firm would make the perfect reference customer, you may not want to send a salesperson whose commission plan is solely based on revenue to make that pitch.
    2. Ensure that you have budgeted adequate resources to capturing the right catalysts. For example, collecting large amounts of customer engagement data is really only useful if you have the resources to properly analyze it and then to implement improvements based on those findings. You may often find that your team is missing key capabilities that you need to augment with training or by hiring a new employee or consultant. Simply saying “we’ll do our best” might not be good enough.
    3. Give yourself adequate runway. If you decide to entirely forgo revenue opportunities in the short-run, make very sure that it’s reasonably possible for you to reach a point where you can raise more capital or flip on the revenue switch before you completely run out of cash.


In my next post, I’ll discuss the next step in putting this into action by introducing a framework to help you identify which group of early adopters can give you the most catalyst for the least amount of effort: the Minimum Viable Customer.


[1] In the scientific sense, the term “catalyst” means “a substance that increases the rate of a chemical reaction without itself undergoing any permanent chemical change.” I’ve translated it into startup lingo as: a thing that increases your company’s valuation and/or probability of success.



Reprinted by Permission.
Image Credit: CC by Andrew Dunn

About the author: Josh Elwell

Josh has substantial experience both in growing technology startups and in the investment management industry. As a Partner at ValueStream Labs, Josh works with early-stage technology companies in the Financial Services industry. Previously, Josh co-founded BuyWithMe, a rapid-growth ecommerce company, which grew to 200 employees in less than 3 years, raised of $37MM of venture capital, and was acquired by Gilt Groupe. Josh began his career in the finance industry and worked as an investment analyst at several hedge funds.

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