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With all of the widely publicized stories of startups generating significant valuations and capital based on user growth, downloads, and traffic, it’s led to a common mis-perception among many company founder and entrepreneurs: “we’re a startup - we don’t need revenue”.
Well, unless you truly have the user growth #’s of an Instagram and are the exceptional standout, you better have some revenue or have a plan for revenue in the near term. Profit is one thing, revenue is another.
Veteran entrepreneur turned VC, Mark Suster, said recently in his blog post: “Why You Need to Ring the Freaking Cash Register" he frequently finds himself having this type of conversation with startup founders:
"If you started to bring in some ad revenue or some data revenue we could lower our burn and have longer to search for options.
If I have to call our co-investors to ask for $4 million more it will be a tough conversation. If that narrows to $1.5 million between 3 of us it’s a no brainer.
If I were you … I’d ring the freaking cash register.”
Here are 3 reasons why revenue is critical just about every startup:
Revenue reduces your dependance on outside capital and that means you hold onto more of your company. Of course outside capital can help you grow faster and capitalize on the opportunity before another competitor does. But having revenue will enable you to reduce your burn rate and use the capital you do have for longer while building your business and developing new sources of capital with potentially better deal terms.
Revenue demonstrates you know how to build a business, not just a pretty app. Sure, investors want to see a high-level of engagement, downloads, viral buzz and large user growth numbers, but showing revenue along with it, demonstrates you know how to build a product/service and tap into a market that is willing to buy. If you can’t actually drive revenue, make sure you have a strategy and plan for revenue and that you are working toward that goal. Even if you are able to drive a hefty valuation and get significant capital (rare for most), investors will want to see that you have the business sense and have thought through exactly how you will monetize, the path to get there and the growth potential.
Revenue proves the viability of your idea by demonstrating to investors and potential acquirers that there is in fact a market for your product/service, a market that can be monetized in some way. The revenue #’s do not have to be significant but large enough to statistically to show that when the company scales, the revenue can scale with it.
So make sure you have the resources, seek outside advice when needed, to get clear and focused on driving revenue in your business. You may need to test and evaluate a few different monetization strategies before you find one that fits your model and shows the greatest potential. You may feel you have no time for this, as what’s critical now is the latest feature build and hiring the right developers. No doubt great products with strong development teams are valuable, but so is revenue, so take Mark Suster’s advice, and ring the freaking cash register!
Chris Bechtel is principal and chief marketing officer at Make Good Social a full-service marketing and business development consulting firm for start-ups and growth-stage organizations focused on strategy + services for demand generation, revenue and growth. Learn more about the firm’s G.O.O.D Revenue Model for growth at the firm’s website www.makegoodsocial.com.