By Kai Sato
There are a few significant milestones for emerging companies: completing their first sale, reaching $1M in revenue and surpassing $10M in revenue. While these revenue figures can seem rather small, the reality is that less than 9% of companies ever reach $1M and less than 1% reach $10M. Anyone who has helped lead a company to such lofty status can attest that it’s difficult. But, once a business has 8-figure revenue, its financing options and growth potential expand exponentially. And in the current state of the capital markets, the stock of cash flow positive companies commands a premium, compared to those losing money quarter after quarter.
I’ve been a part of reaching such milestones first as a founder and then as an advisor, entrepreneur-in-residence (EIR), and board member in the startup/venture capital world. The industries have varied, ranging from sportstech and media to foodtech and climate.
Microcaps, however, are faced with a common trap on their path to meaningful revenue, which I experienced firsthand as the co-president & chief marketing officer of a smaller Nasdaq-listed company. In their quest to attract investors, microcaps over-prioritize touting a large total addressable market (TAM) and under-prioritize executing a sound go-to-market strategy (GTM).
While it can seem counterintuitive, in order for microcaps to become big, they must first start small, and it requires disciplined execution. There is no silver bullet. If you reverse engineer nearly every successful company, including notable microcaps like Amazon and Netflix, each started out in a similar way. It discovered and then dominated a niche. It turned its earliest customers into evangelists, which helped grow sales. It later enjoyed even bigger breakthroughs thanks to marquee customers or strategic partners.
As Peter Thiel says, “The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse. This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to ever reach that 1%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero.”
I’ll be speaking on this topic at the inaugural Microcap Conference hosted by DealFlow Events. However, let me preface that this approach is expressly for microcaps that have a product or service, not biotech or IP licensing. It’s for companies building incremental value each day, not waiting for something like FDA approval to create a windfall.
1. Go-to-Market Strategy – Dominate a Niche
“Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. Amazon shows how it can be done. Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books.” -Peter Thiel
To improve go-to-market strategy, a great approach is Amazon’s “Working Backwards,” which I started using while serving as the EIR for a global foodtech accelerator. At Amazon, before new products go into development, all relevant team members write a press release together. Even Amazon Web Services (AWS) began this way (now doing $80B in revenue), so it’s tough to argue with its results. This proven process aligns the team on dominating a single niche market and obsessing over which customer it’s going to serve. Furthermore, it forces the team to ultimately garner a real customer’s quote, which only stems from proper customer discovery.
While all this may sound simple, it’s actually a brutal, painstaking process. There is usually exhaustive debate over which customers to pursue. There can even be infighting over verbiage and grammar. However, it forces you to think about the business from the outside in, not only focusing on the customer but requiring one to go on record for your company.
It also provokes important questions, like how many of these customers exist (e.g. market size)? Is their problem one you’re passionate about solving? And, does this niche help you reach your ultimate goal, as with Jeff Bezos deliberately starting with books?
2. Customer Acquisition Communications – Accelerate Customer Word-of-Mouth
“Even if you have an incredibly fantastic product, you still have to get it out to people. The engineering bias blinds people to this simple fact. The conventional thinking is that great products sell themselves; if you have a great product, it will inevitably reach consumers. But nothing is further from the truth.” -Peter Thiel
Building from the press release, your company will next become positioned as a thought-leader in its niche market. You’ll garner other press from trades, blogs, podcasts, and conferences. You’ll grow your social media presence and publish content that accelerates “word-of-mouth” among your target customers. Over time, your company will evolve into its own media outlet, largely dedicated to making your customers look great and highlighting how your company helps them succeed.
The key here is to convert your earliest customers into evangelists and to build out the infrastructure for their “social proof” to be noticed by other prospective customers. I first had to learn this the hard way as a cofounder. Our company had won awards and attracted notable investors, but we weren’t adept in showing customers why we were credible. So, I first published an op-ed for HuffPost, which soon led to writing a recurring column for Entrepreneur and later Inc. Each article would be tweeted out to millions of followers. This led to TV interviews with CBS and FOX, then speaking at SXSW. All of this helped create a buzz among our earliest customers and made them proud to talk about how they’d had the vision to start working with us; we then shifted the narrative to highlight our customers, further accelerating word-of-mouth. I’ve replicated this process multiple times as a chief marketing officer, with one company going on to be acquired and another going public on Nasdaq. Early customers become your sales force, which is further detailed in my book, Marketing Architecture: How to Attract Customers, Hires, and Investors for Any Company Under 50 Employees.
Just keep in mind that there’s a lot of noise out there and building thought-leadership takes time, usually at least six months to a year. You also have to factor in seasonality, annual events, and budgetary cycles. But, you should stay focused on this phase until you have determined your customer profile and know how to acquire them.
3. Transformative Business Development – Go “Whale Hunting”
“Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.” – Peter Thiel
With a strong foothold in your niche and the customer acquisition process defined, you’ll next go “whale hunting” and secure the most transformative strategic partnerships and/or land marquee customer(s). This is the most fun phase, but companies can often rush into it. For the more traction you achieve in the previous phases, the more leverage you’ll gain with prospective partners and customers.
I recently had a company make this mistake. The founders wanted to partner with a multibillion-dollar, public company, and I had the right relationships with its C-suite. But, they first needed to dominate a niche and garner more traction. It can be hard to refrain, knowing that one email, call, or meeting could completely alter a company’s trajectory, but the key to creating synergy is connecting with the right people at the right time. So, we’ll see….
Kai Sato is the founder of Kaizen Reserve, Inc., a venture capital advisory firm for corporations and family offices, helping align their existing assets with synergistic startups. He’s also a strategic advisor to select early-stage companies, including publicly-traded microcaps. He’s the author of “Marketing Architecture: How to Attract Customers, Hires, and Investors for Any Company Under 50 Employees.” He has been a contributor to publications like Inc., Entrepreneur, IR Magazine, Family Capital and HuffPost; he has also spoken at an array of industry conferences, including SXSW and has been quoted by publications like the Associated Press and The Los Angeles Times. He is also the board chairman of the University of Southern California’s John H. Mitchell Business of Cinematic Arts Program. Follow Kai on LinkedIn www.linkedin.com/in/kaisato or X @KaiDaywalker.