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8 April 2016
Growing Revenue May Kill Your Startup
Revenue means cash that is coming into your bank account every month from your customers. Not investors. Customers, those who are buying your products or services. You are doing everything you can to make sure this number grows, mostly because you use this money to pay your rent, buy food, and settle that graphic designer's invoices. Without revenue, your startup will die, right? Yes, maybe. But in my experience, growing revenue may kill it even faster.
I see this rather typical pattern in many startups we interview at SeedRamp. The idea is great, the prototype works, the first customers are on board, and the first payments are coming in. The founders are excited. They spend all their energy to make sure those first paying customers are happy by creating new features, fixing bugs, and employing new CRMs. They also try to acquire new buyers and pay for marketing, promotion, and Google AdWords. The numbers grow every month and ... they don't realize they are actually killing their own startup.
If you're building a cafe, a bakery, a web development studio, or a bicycle repair shop, a growing customer base with stable revenue must be your main objective. Because your main source of income is the profit you will get from the business, in the form of dividends.
How rich you will become depends on many factors, but usually such a lifestyle business takes years to really take off and start making millions of dollars, which you're obviously looking for.
In that type of business, almost everything depends on your energy, your management skills, and your ability to work non-stop and motivate others to do the same. If you have all that in place, you most certainly will get what you deserve sooner or later. In most cases, later. But you will get it.
The concept of a startup company is completely different. A startup is a wild bet you're making on some crazy idea that makes "the world a better place." You're building a new Facebook, a Google killer, or a Snapchat replacement. Your goal is huge, while the investment is very small. Just a few years of work and you'll score hundreds of millions. This money will come not from happy customers and steadily growing revenue. Not at all. You will become filthy rich only when someone buys your startup.
These two strategies contradict each other: a traditional business vs. a startup.
Customers and revenue are not the goal of a startup, but rather an instrument that helps you achieve the real goal: valuation. You are supposed to use your revenue to convince investors that the prototype works and your valuation is already high enough. Your steadily growing cash flow right now must be used as a demonstration of a future customer acquisition model. But it is not the result by itself. It is just a tool in your hands.
Your valuation is what makes you rich, not your revenue or your happy customers. Of course, the revenue is important, but only as long as it serves the main goal—increase valuation at an extremely fast pace. The revenue is not the goal; it's the way to achieve it. The valuation is the goal.
Startup valuation must grow fast, ideally doubling itself every few months. If that's not happening, close the business and start something else. The valuation must skyrocket or you have to abandon the startup and try your hand on another one as soon as possible.
One of the biggest mistakes a startup founder can make is to forget about this "skyrocketing valuation" principle and focus on making customers happy and grow revenue. You will most likely kill your startup and maybe turn it into a lifestyle business.
Savvy investors will avoid you, mostly because they understand that growing revenue is just one of many other elements of a growing valuation. If you're focused on just one element, you most likely won't multiply your valuation a hundred times over the next year. Maybe you will multiply revenue a few times, but who cares? The revenue is good for you but not really good for investors.
What is good for investors? What do they want to see you doing to convince them that you're working hard on making the valuation grow? I'll try to cover that in one of the next articles.