The Wilderness Period

Acknowledgement: Josh Kopelman at First Round first coined the term Penny Gap in 2007 to describe the difficulty in getting consumers to pay anything for the premium version of a free product. Here I’ve repurposed the term to refer to a hurdle faced by SaaS companies. In both cases, the binary proof signified by the milestone is more significant than the amount of revenue, which is why a “penny” suffices.

Crossing the penny gap

• Between the time a seed-stage SaaS startup ships its MVP and closes its first few paying customers is the Wilderness Period. This is when you find out that your MVP isn’t really MVP.
• You try to sell your minimum viable product, encounter objections you hadn’t anticipated, race to code the new requirements (the new MVP), and repeat. The Wilderness Period can take two months, two years, or forever.
• That unknown makes this one of the most unsettling periods in a startup’s life, as the pure potential and excitement of building the MVP confronts the reality of not being able to find paying customers. Or as Mike Tyson said, “Everyone has a plan until they get punched in the face.”
• The Wilderness Period ends when the startup finally makes its first few bonafide sales. I call this crossing the Penny Gap. But selling to friends and classmates doesn’t count; only unaffiliated revenue qualifies. And the milestone isn’t satisfied just by closing the customer, you also have to implement them successfully and turn them into happy references. In other words, these deals only count if they are potentially repeatable.
• The Wilderness Period ends when the startup finally makes its first few bonafide sales. I call this crossing the Penny Gap. That first penny of happy unaffiliated repeatable revenue is the first critical milestone for a SaaS startup, as it proves that (1) the team won’t be stuck in the Wilderness forever; (2) the founding idea is not just a good story, there appears to be a market; and (3) the team has the ability to convert promise into traction*.*

Reverse-Engineering the Buyer

• “Most SaaS founders these days are product-first. They have a strong idea of the product they want to build and the value it will create but still need to figure out their go-to-market strategy. So they launch an MVP, see the reaction, have some initial sales conversations, improve their understanding of the potential buyer, and iterate on the product to make the offering more compelling to the next set of prospects. Effectively they reverse-engineer the buyer. The process is recursive and requires founders to answer the following questions:
  • What immediate pain do you solve?
  • Who exactly is the buyer?
  • What is the sales motion?
  • How does the team and its belief system need to evolve?

Crossing the Penny Gap

• Once you’ve crossed the Penny Gap, you’re out of the Wilderness and in an exciting new phase of learning from actual customers. This is a huge milestone and confidence-booster for the team.
• Now the question is, can you keep it going? Were the initial sales a fluke or are they repeatable? Your next critical milestone is month-over-month growth. 20% monthly growth below $1 million of ARR and 10% above $1 million is the benchmark for SaaS startups. If you can hit these growth rates, you are well on your way to a great Series A.