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Project business as a critical growth factor for start-ups?!

When can project revenue jeopardize the success of a start-up?

Investors want to see quantitative evidence of the demand for a product, the so-called “traction”. These can be product sales, for example, but also registered and active users, etc.. Start-ups usually prove that the idea and the product can find customers and be sold on the market.

Turnover is not equal to turnover

It can always become problematic when revenues are generated from project business. Investors clearly differentiate between project and product sales. In the early stages on the way to proof of concept, project sales are very often taken by start-ups in order to further develop the idea and the product and to collect brands. On the way from Proof of Concept (PoC) to the so-called Product Market Fit (PMF), however, project sales can be counterproductive and hinder the actual goal. Resources are tied up for projects that would have been better focused on the Product Market Fit. As a result, the product market fit may be delayed and the associated long-term loss may quickly outweigh the short-term positive project revenue. Project sales can also cause problems in later start-up phases.

Projects cost time and time is money

The implementation of project orders always ties up resources. Often more resources than originally planned. An example:

A start-up company has strategically decided to supply its software solution to new industries. They have received the lucrative order from a large company to adapt the software for the industry and integrate it into existing systems. The effort for customization and integration is spread evenly. The founders considered whether to accept the order, as the further development of the software in the core business was planned in parallel and thus a strategically important upselling of existing customers and a strong acquisition of new customers was to be achieved.

The order from the large company was actually completed in the required time, but the introduction of the software for the core product was postponed by several months as a result. This caused several problems at once. On the one hand, the sales department waited for the new product and did not generate any new business. On the other hand, it was not possible to up-sell with the existing customer. Both were strongly criticized by investors, although the project order compensated for the loss of sales. But why? As a result of the delay, the churn rate doubled, new customers failed to appear and existing customers paid the old price. Of course, it is clear to every investor that new markets can only be conquered through investment.

How can you benefit from the project business without endangering your own product development roadmap?

In the example, half of the investment was achieved in the core product. Here, too, the company has its undisputed strength in developing its secret sauce. However, when it comes to integrating the software into the customer’s systems, an alternative is to get an IT service provider on board. The advantages are obvious. IT service providers are specialists in the integration of software systems, know the customer requirements and change requests exactly and are happy to deal with iteration. In case of doubt, own resources work for the first time in the environment of a large customer environment and this results in high inefficient ones, which the start-up carries.

Although the turnover for the integration is given up, the own resources can concentrate on the product and strategically a partner is built up, who on the one hand gladly takes over the integration and can even actively acquire customers out of his own interest.

In principle, it is always a make or buy decision, with start-ups often opting for “make” for reasons of turnover, but possibly a “buy” would be better.