Using the Customer Development model by Steve Blank, how do the cashflow projections look compared to a typical model.
The reality of entrepreneurship is more like getting on the highway in a fast car and trying not to run out of gas before reaching your destination.
Most cashflow projections for new business models will go up and to the right, either in a linear fashion or a hockey-stick fashion.
Model Cashflow for a Startup
- Cashflow Modelling – Linear Growth vs. Hockey Stick Growth
- Investing in Linear-Growth vs. Hockey-Stick Model: Risks and Rewards
- Customer Development – Cashflow Model
- Raising Capital and The Personal Debt Trap
- Cashflow Forecast – Up and to the Right
- Customer Development Process – Resources
Cashflow Modelling – Linear Growth vs. Hockey Stick Growth
Business Model 1 – Linear Growth Projections

Business Model 1.1 – Hockey-Stick Growth Projections

The (negative) sum of the larger red bars relative to the smaller green bars in the first several months of each model is the “required” need for investment.
Business Model 1a – Linear Growth Breakeven

We can see that if we play this Linear-Growth business model out, based on the projections, the business will start to go ‘Cash Positive’ in about month 9.
That means the sum of the difference between the red and green bars (negative) is roughly the required investment in months 1 – 9. Let’s just imagine that this sum amounted to $500,000.
The entrepreneurs behind this business model seek to go out and raise $500,000 at X valuation for one of the following key expenses:
- product development for innovation on current offering
- marketing spend to acquire new customers
- sales professionals to close current contracts
A linear model is more likely to be related to sales & marketing, as the business model is not designed to go exponential unlike 1. 1a. It also already possibly has some sales and is not starting from zero.
Business Model 1.1a – Hockey Stick Breakeven

In contrast, if we play the Hockey-Stick business model out, based on the projections, we can see that it hits a point of ‘Cash Breakeven’ (ie. where the green bar would exceed the red bar for the first time) in month 10.
The difference between the two models is that the company is burning heavy cash in the hockey-stick model on a monthly basis in the vast majority of the 9 months leading up to the projected point of cash breakeven.
The (negative) sum of the projected losses in months 1 – 9 is again the required investment. Even though the red bars in the hockey-stick model are smaller in size than those in the linear growth model, the corresponding green bars are also smaller, meaning that the net cash burn in months 1 – 9 is likely equal or greater than the linear model.
Let’s imagine the entrepreneurs in the hockey-stick model also set out to raise $500,000. What will be the allocation of that capital?
Likely it will be riskier model and focus more on the product-development/early sales cycle compared to the linear model. Conversely, the hockey-stick model will also carry more upside if they can hit the growth inflection point according to projections.
Investing in Linear-Growth vs. Hockey-Stick Model: Risks and Rewards
Business Model 1b – Linear-Growth Investment (reality)

Let’s imagine this plays out as above. The business is not a ‘failure’ but it does not meet projections, a very common scenario. The investors who put in $500,000 will now be receiving a cash call in the later stage of the year since the company will run out of money at this pace.
Then it will be another forecast (up and to the right), explanation of factors that led to this place, and as assessment of risk vs. reward. At this point there is a high probability that:
- the business will ultimately fail
- the business will take on debt (through personal or private loans) to survive in order to raise more capital
The major assumption that many entrepreneurs or business owners make in this model is that the business ‘needs more capital’ but many investors will fail to see it that way.
Business Model 1.1b – Hockey-Stick Growth Investment (reality)

If we imagine that the hockey-stick model plays out as above, investors will be in a very tricky space here as well. The business will need an injection of cash to continue through year one, but the business is growing in line with its potential, it just happens to be delayed.
That $500,000 will be gone as we approach months 10 – 12 and the entrepreneurs will be out raising to save the company. The questions will be:
- what happened that caused them to miss projections? (product delays, sales cycle issues, etc)
- is this model on track to go hockey-stick in year 2 or is it truly a linear growth business?
- what is the upside in the market in years 2+ for this vertical?
At this point, the entrepreneurs may again be using debt (personal or private) to try and plug the hole as they raise capital. It is very difficult in situations like these to simply turn the expense taps off and ‘preserve capital’ because the business requires it for growth.
Customer Development – Cashflow Model
Looking at the post on Customer Development, we outlined the 4 steps of the Customer Development process.

Each phase of the Customer Development process is ‘gated’ ie. you wait for validation relative to customer feedback before proceeding to the next step in the process.

Customer Discovery pertains to validating the product relative to the business model.

Most compelling businesses from an investment perspective start with an alluring vision of the future in some market and the ‘expectation’ of riches in the future. Visions of ‘the next Airbnb’ or ‘AI for X’ help convince investors to stick in money today and plan to cash out in 3 – 5 years.
What the investors typically end up getting instead is a cash call 10 – 12 months later.
Under a Customer Development model we can forecast something more like below.
Business Model 2 – Customer Dev. Cashflow Forecast

The key to the forecast is to:
- keep the cash burn low in the Customer Discovery Phase
- wait for some form of Customer Validation before pouring capital into Sales & Marketing
- be flexible on the revenue streams + business model; many times a better business model emerges through the Customer Discovery / Customer Validation process

The creation of a Sales Roadmap (as part of the Customer Development framework) requires some validation relative to CAC (Customer Acquisition Cost), margins, and pricing. Part of the problem with any model is that these assumptions take time to test. The difference in ‘evidence’ between month 1 and month 7 will be exponential.
Business Model 2 – Customer Dev. Cashflow Forecast Phases

None of the above will necessarily prevent the business from needing to raise capital in months 10 – 12 as shown in Part 1 of this post; however, it sets a different expectation, process, and strategy in motion with how to deal with any capital that is raised:
- it paves the way for potentially raising a smaller amount upfront
- it creates better incentives to hit targets on the projections roadmap
- it doesn’t assume the business goes hockey-stick growth, but shows a path for how it could
- it gets the entrepreneurs and their teams into a different mindset than one where they assume they can work for 10 – 12 months and be able to raise capital to ‘scale’ in the future
Raising Capital and The Personal Debt Trap
Raising capital is not easy for the vast majority, save for those who have close connections to large amounts of capital (ie. why not!) or those who have successfully been part of the early-stage team of a company that exited or IPO’d in the past.
A lot of people will get “ideas” about raising capital from the media or major tech news sites that give them the impression it is ‘easy’ since there appears to be so many companies doing it.
First and foremost, virtually any form of professional capital (angel, venture, institutional) will come with some form of strings attached. Secondly, those who invest have an investment strategy and assume that most businesses will fail in their portfolio – they make money off of the ones that don’t because they go multi-X.
That means that even when you do raise capital from some form of professional investor, you are only going to end up paying your salary for the time the business is in existence, as without an exit in the future the equity will either be worth less than you expected or nothing.
Furthermore, signing any Term Sheet usually has multiple ratchet/anti-dilution clauses to protect a VC from a down round, or preferential clauses in the event of a ‘firesale’ to ensure they recoup their own capital first. Both scenarios mean the entrepreneur(s) are only likely to ‘make bank’ if it is a huge win sale or IPO.
TL&DR – Raising Capital is no guarantee of a future payout
Yet capital is necessary. The question is what type of capital to raise? Ideally, we want the right type of capital for the business and to inject it at the right time.
Unfortunately, if we are looking at this type of model:
Business Model 1c – Linear Growth Model Outcome

Business Model 1.1c – Hockey-Stick Growth Model Outcome

We know that the businesses in both situations are likely in dire straits without further investment. These are typically the scenarios where entrepreneurs do whatever they can to save their businesses, which in many cases can include:
- loans from family and/or friends
- personal credit card debt
- personal asset collateralization
This scenario is how many entrepreneurs and their respective families end up losing everything. The problem is that adding capital in rarely solves the core problems.
Customer Development, Business Modelling, Smart Capital

To bring it full circle, we need evidence and proof before pouring capital into a business.
The Customer Development model consists of four well-defined steps: customer development, customer validation, customer creation, and company building. Each of these steps has a set of clear, concise deliverables that give the company and its investors incontrovertible proof that progress is being made on the customer front. Moreover, the first three steps of customer development can be accomplished with a staff that can fit in a phonebooth.
The Path to Epiphany – Chapter 2
We also need capital to bootstrap customer discovery, fund inventory or product development, acquire new customers. We want to do it in a way that minimizes risk and maximizes returns for all parties involved.

To oversimplify, we don’t want to raise capital without merit and so ‘bootstrapping’ is ideal through a Customer Discovery phase until at least the point of Customer Validation. The type of money that can leveraged at that point is much ‘smarter’ and less risky. It doesn’t mean the business won’t end up failing in the end, but the approach and set of expectations in the Customer Validation phase are much different.
Will entrepreneurs use personal or 3F debt (friends, families, fools) to bootstrap?
Many will out of necessity. That doesn’t mean it is recommended (it isn’t); however, the mindset around allocating that debt and the expectations will be much different than a scenario where you raise equity capital early on from the 3Fs and are forced to cover hemorrhaging losses later using personal debts as described in models 1 and 1.1.
Remember also that any professional investor will do due diligence on the debts owed before making an investment. Excessive debts are not likely to be bailed out automatically in a future equity fundraise.
What are alternative sources of capital to fund Customer Discovery/Validation?
Donation or equity crowdfunding provide one such option.
The challenge is that they are time-consuming processes and each platform will require a level of due diligence that is not dissimilar to raising investment, plus some capital is typically required to create a nice video and campaign. The upside is that it forces an entrepreneur and the team to deal directly with customers head-on in the process.
The best case is that customers want the product/service so bad that they are willing to fund its creation. If we think about this relative to an ‘Early Market’ and the Chasm, there are many Innovators and Early Adopters who would qualify as those types of customers.

Medium – Designing for the Chasm
In an equity crowdfunding campaign, investors get actual equity. In a donation crowdfunding campaign, the ‘donators’ typically get rewards in the form of the actual product/service or a social-capital boost in the community of the company.
In either scenario, even a moderately successful campaign can be 10X more productive than a traditional fundraising campaign that takes 10 iterations of a pitch deck, multiple meetings, and a lot of time away from the business to be successful. But it is time consuming and certainly not right for every business.
It is a question of:
- the type of business and history of founders
- the amount of capital required for the business
- the likelihood of needing followup capital in the short-term
Cashflow Forecast – Up and to the Right
Virtually every cashflow forecast is ‘up and to the right.’
Reality almost always tends to turn out differently for a variety of reasons. The ability to raise capital ad hoc is a luxury few have, and even in the cases where it is is possible, it rarely fixes the core problems.
Customer Development, Value Proposition mapping, and Business Modelling are arguably the most useful tools to get on the right track from Day 1. Using these tools to help set expectations and guide would-be investors through the vision is imperative.
Customer Development Framework

Value Proposition Testing

Multiple Business Models

The reality of entrepreneurship is more like getting on the highway in a fast car and trying not to run out of gas before reaching your destination. There are twists and turns, ups and downs. It rarely goes smoothly, it will be often be treacherous.
On a cashflow basis, this means that the model will likely see non-linear growth and require more time (ie. cash burn) to see success than originally forecasted.
