Startups: Now Is the Time to Seek Instant-Payback Models
COVID-19 has transformed the startup world. While it has decimated some businesses, others — like companies in the telemedicine or remote work spaces — have experienced a boon. For enterprise-serving startups, there has been a lot of trouble in the top of the sales funnel as customers across the board tighten their belts to survive the ongoing pandemic.
As a senior associate at the venture capital fund Amplo, part of my job is hearing pitches and diving into companies. As a result, I have begun to notice a few patterns with enterprise-facing companies that are struggling.
From multiple founders, I’ve started hearing things like, “We had a really big deal lined up with [insert company name], but it fell apart once the pandemic hit.” It makes sense: An enterprise that is figuring out whether or not it can keep all of its employees is certainly not in a position to purchase a software.
Before the pandemic, it was not uncommon to hear a good pitch from founders whose main value-add was that they were going to save a company tremendous amounts of money in the long run. These were companies whose whole purpose was to protect their customers from costly but uncommon incidents, to save money in labor costs over the course of years or to make their customers money over time by increasing the productivity of their employees. Pre-COVID, that value proposition made a lot of sense to customers. But now it’s just another cost.
One industry that has been hit particularly hard by the shift in sentiment is the talent retention and management space. This sector had flourished on the potential long-term cost savings and revenues that finding and retaining talent brought their customers, but those same pitches are now falling flat. Relying on long-term cost savings, even if they are immense, is no longer a good sales pitch because enterprise buyers need your company to cut their expenses now. They need your company to make them money now. They need you to do both. Now.
In other words, enterprise buyers are still interested in buying if there is an “instant payback” on their investment. Instant payback occurs when an enterprise-serving software pays for itself within the first month via the costs it cuts or the revenue it generates. After looking into a few enterprise-facing companies that were having good success during the pandemic, I discovered that there are two ways a company can demonstrate that their enterprise customers will get an instant payback.
1. Show the Customer That the Costs They’ll Save Within the First Month Will Pay for the System
An example of this would be implementing software that enables a company’s entire operation to go paperless, thereby yielding them huge cost savings within the first month that are greater than the implementation cost of the system. This would obviously continue to save them money month after month following the purchase, and because it offers an instant payback period, cash-strapped enterprises would jump to implement it.
Evisort, an AI-enabled contract software, offers a real-world example of this strategy succeeding despite the pandemic. The software’s features allow the corporate legal departments of enterprise companies to do more work in-house, which cuts down on the work they have to send to outside counsel, who bill exorbitantly for their work. Because Evisort’s software allows its customers to realize immediate cost savings in an area that is normally a huge expense, they have a much easier time talking with and securing enterprise-facing clients than most do during the pandemic.
It’s important to note here that some startups make the mistake of talking about the labor costs they will save companies given that employees can now focus on other tasks. This is a problem because the only way to realize these savings is to fire someone, which is probably something that the company is trying to avoid doing during the pandemic.
2. Implement a Revenue-Sharing Model So You Only Make Money When They Make Money
This is a simple model that can easily show enterprise customers an instant payback. If you can find a way to make money whenever your enterprise customer makes money from your service, you have aligned your interest with the customer in a powerful way. Further, if you can waive your implementation cost or guarantee that your take rate only comes in after a number of sales are driven by your service, then you may have enterprise clients that are coming to you organically since they need a cost-effective way to drive sales despite a remote or reduced workforce.
Ucardia, an early stage cardiac rehab mobile platform, realized the power of revenue splitting to drive business during the pandemic. Rather than charging for its software on a monthly basis, it chose to have a revenue split in place for those who referred its system. This tactic has made selling the product significantly less painful, despite most of Ucardia’s customers actively cutting costs since they’re seeing fewer patients during the pandemic.
Fortunately for a lot of companies that have top-of-funnel trouble, it’s not too late to implement a model that provides an instant payback to potential enterprise customers. For most companies, all it will take is a change of pricing, focus or a little bit of both for them to be able to promise their customers immediate returns. In the case of Evisort, it chose to focus on the external costs its software cuts instead of the time it would save legal departments, which is a small but important pivot. And Ucardia’s promise to prospective customers was that it would only win if they did.
On the VC side, you should encourage startups that you talk with to incorporate an instant-payback model into their service because, even if it is not a huge money-maker for them at the moment, it can serve as powerful way into an enterprise — which they can then upsell on other services once the pandemic is over and belts start to loosen.