Does revenue matter?
When you’re pitching your early-stage startup, does revenue matter? Sometimes yes, sometimes no. There are those who will tell you that revenue is the only thing that matters - they’re wrong.
? Revenue measures your ability to sell. This is often not the same as your product’s ability to deliver value to the customer.
? Are your initial customers the right ones? Are they highly engaged? Are they using the product as intended? Are there upsell or expansion opportunities? There’s a concept, “quality of revenue,” used to evaluate public company reports, and it applies to startups as well.
? In any early business, there are a few critical leading indicators of success and many other indicators that are “vanity metrics.” In some cases revenue is the antidote to vanity metrics - an investor may cut through a bunch of irrelevant numbers by focusing on revenue - but in other cases revenue itself is a vanity metric.
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I’m most familiar with B2B businesses. Founders are often defensive about their small number of customers, or about the fact that those customers are free or discounted; for me, though, I’m much more concerned about the experience of the customers you do have. A handful of customers who are delighted by the product, who use it frequently to get real work done, and who will do reference calls with an investor can be a strong positive signal.
Conversely, short term revenue growth numbers off a small base are pure vanity. When you go from $10k revenue in March to $25k in April and promote that as “150% MoM growth!” - what you’re implying is that I should extend that growth rate into the future, which would imply $15m/month next April. If you find an investor who falls for that, you and he deserve each other.
All else being equal, of course, paying customers are worth a lot more than free customers, because they are a stronger validation of perceived value and of pricing strategy. So, if you can get paying customers without sacrificing more important activities, by all means do. Just don’t feel like it’s the only path. What you need to do is demonstrate to yourself and to investors evidence of product/market fit - sometimes that evidence is on your revenue line, sometimes it’s somewhere else.
I enjoyed that, Spencer :-)
Consulting/Fractional Experienced Chief Operating Officer
3 周Love the concept of quality of revenue. I spend a lot of time with early stage owners and their sales team on this theme. Understanding the path to quality profitable revenue is critical, it doesn't have to be present on day 1 as (especially in B2B platform/marketplace models where presence building and foundations for scale are developed) but the decision needs to be concious and needs to be accompanied by the strategy and mechanisms to ensure a clear path to an accretive top line.
Entrepreneur & Startups Helper
3 周Great point Spencer Greene. Emphasizing customer experience over sheer revenue builds healthier growth and shows investors that the startup values real, scalable demand.
Raising money for startups all over the world from investors all over the world - Glenluna Ventures. Principal - Manchester Angels
3 周Revenue matters when it's the right kind of revenue (recurring in a SaaS business as opposed to services in the same business) as a proxy for hypothesis validation early-stage. Then as the business grows there should be a lot more evidence of validation, PMF and growth trajectory that makes revenue in of itself less important.