收入重要吗Does revenue matter?
by StartupCFO
From the title of today's post you might be thinking that I've lost the plot, but this is a legitimate question for any venture-capital backed startup on a quest to deliver big multiples to its shareholders. For "normal" businesses (i.e. those that don't require large periodic infusions of capital) revenue and cash from operations are like blood. Without them, you're dead. So, let's look at the role and importance of revenue for hi-tech startups.
The case for revenue
Revenue generation is an important milestone in the life of a startup. Your product is ready and customers are actually willing to pay for it. In the context of raising money from VCs revenue plays a very important role:
- Validation that people actually want your products
- Paints a picture that there is a path to building a viable and large stand alone business
Unless you're in the Valley and working with some forward-looking VC funds, you cannot raise real money without a credible business model and large potential revenue stream. Here on the east coast this is very important. Especially with the dreaded recession word on everyone's lips.
Exits don't (usually) drive from revenue
Despite the importance of revenue the funny thing is that when a company buys you, it's not usually for your revenue stream. As a result, the price they pay is not a multiple of those revenues. Instead, the rationale for acquisitions and their pricing is based on one or more of the following drivers:
- Building a relevant product or service that people love and use regularly
- Acquiring a large base of users for which you have valuable usage and demographic information
- Key products or technology that can add value when applied to the acquirer's business
There are other drivers, but these are the big ones and they are independent of the level of revenue that you have.
The inflection point
There comes a point in the life of a startup when it must make some big decisions. Do you stay lean, focus on product, acquire a small, loyal user base and sell early? Or, do you double down and raise the capital needed to build a go to market team and a large revenue base?
I call this an inflection point because it has a big impact on all stakeholders. If you're a founder, you will sell a lot of your company. If you're a VC, you'll be making a big bet. And if you're a buyer the price that you pay is going to go up.
Given that companies are not (usually) bought for their revenue streams, the question is whether as a founder and VC you will get an adequate return on the $ invested to build that revenue base. It's unlikely that an acquirer will keep your sales team. In addition, marketing and all back office functions will be run by the acquirer. So, all they really want are your developers, product experts and perhaps a biz dev evangelist. The rest is noise. They won't pay a premium for it. Moreover, today's tough public stock markets won't tolerate an acquisition that doesn't immediately improve the buyer's earnings per share.
So, what's the bottom line (actually the top line, I guess…)? As a startup, you must have a credible business model and a ready market of people and companies willing to pay for your offering. You will have a tough time raising capital without a revenue story. You should get in market as early as possible, both to generate revenues and more importantly, to improve your product. However, you might be well served to make only modest investments in your sales & marketing team until you have really solved the problem that your company addresses and until you see a credible path to building a large self-sustaining company. Until you have both of these elements, stay lean and mean and focused on product and technology.
