Revenue · Venture capital

How do VCs look at start-ups with no short-term revenue prospects?

Richard Pridham Investor, President & CEO at Retina Labs

July 13th, 2015

It would appear that revenues, at least in the short-term, matter far less today than in the past for many start-ups. It seems that user adoption is the new currency. When building a start-up that has not yet identified a precise monetization strategy, what are some recommendations for shaping an investor pitch. I'm a bit of an old school type that is most comfortable with revenue models and projections. So I'm a bit out of my element having none of this at hand. One start-up idea I'm looking at is all about user traction. Once a critical mass is achieved, then monetization opportunities (probably ad-based and something transactional) will become possible. I have no idea how long it will take to achieve this nor do I know what level of adoption equates to a "critical mass". Is it 100K users, 1 million or 10 million? Suffice to say, it will take some time to build product and gain market traction. In the interim, and assuming there is a reasonable flow of users, how would investors look at something like this? To scale to that critical mass would require a considerable amount of capital.
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Leena MBA Content & Publication Manager at NetApp

July 13th, 2015

You're on the right track. I would also add to your comments that the churn rate of visitors or would-be patrons would need to be figured out. If you're not making money in the short term, I would, as an investor, be just as interested in the quality of visitors, as much as quantity. In fact, I would be more interested in the former. You can iterate your company based on the feedback of true, quality followers, but the less sincere, "churn-y" types who just come and go will not add value over the long-term.

Quality patrons bring other patrons through word-of-mouth, social media sharing, etc. Those are the people you want to attract and build -- and those are the ones you want to show on your pitch deck. I would be far more interested in 500 loyal, repeat users, than 10,000 uniques who came and went. I can build on that 500. But I can't work with the latter, unless they come back to a product that has good product market fit. The ones who will help you determine that are the few, the loyal ones.


Barry Mavin Founder and CEO of Lianja and Recital Corporation. Principal developer of the Lianja and Recital software products.

July 13th, 2015

I would have thought that there is no one answer to this question. It very much depends on the "type" of product or service that is being developed. For example the site / user / visitor metrics could be for a low cost consumer oriented product or for an enterprise product where the revenue opportunities are completely different.

So it would seem that a way of categorizing the "start-up" needs first of all to be identified and then you can project the revenue opportunities. In some cases the "start-up" may just want to position itself for acquisition and user adoption or interest may be enough to value it. So "revenue" in this case does not equate to $$$ earned but rather $$$ potential.



Scott Miller

July 13th, 2015

I am stuck with this battle as well.  I am little bit old school.  I think that real value should be generated at the onset.  And nothing measures real value better than revenue; where revenue means you have consumers willing to part with their money.

Having an audience, when the the price of admission is free, does not mean your 'show' has value.  So, unless your value added proposition is to sell your client base contact information, you cannot be assured your service has any real value unless you have clients handing you their $$ for your service.

My 2-pennies...

-Scott

Samuel Lavery Devops at Domino Data Labs

July 13th, 2015

This is called density, and depends on the products signaling attributes to determine the numbers.  But, you focus in 1 geolocation, get your traction then expand the model.

Christophe Lassuyt co-founder at Moneytis, avoiding fees on cross-border money transfers, using Blockchain

July 15th, 2015

Hi 
That is exactly what has been advised for Moneytis: we currently count regularly users number increase on one corridor (money transfers between Mexico and Europe), and once it has been proven that our model is replicable and that we found the solution to improve the customer base, we receive investments.

PS: we are currently "proving" our growth and investors seem willing to have regular contacts with us to see the customers numbers increase

Donald Steward Owner, Problematics LLC

July 13th, 2015

My situation appears to be unique. I have developed a method for using a computer program to help solve problems that are far beyond the capacity of unaided humans. I have used this program to propose how Congress could address some of the problems that have them in conflict.

But this method is unique. I am an emeritus professor who had developed an earlier problem solving method used in engineering that has been the subject of annual international conferences on DSM, the 16th in Paris last summer. (dsmweb.org)

I have been working on the logic to develop a more recent problem solving method, the Explainer, for nearly two decades. I have used it to solve problems where there is no evidence that anyone else has solved them. And these problems are important enough that they need to be solved.

But on the surface it looks preposterous. It requires someone to look below the surface to appreciate its power and applications.

I would like to see it made available on the web where people could collaborate to solve some of the problems that have created such world-wide chaos.

The program would be used by a small number of bright people who would use it to solve important but complex problems that would alleviate some of the problems that are causing society so much trouble.

When people cannot solve problems that cause them anguish, the problem solvers can gain respect from those hurt by the lack of seeing their problems solved rationally. So if no one else steps up to solve them, I will. 

Problem solving conveys power to the problem solvers. If some of our bright citizens can solve the problems that vex Congress, they may wrestle some power away from the big moneyed interests.

When people cannot see the problems that affect them adversely being solved rationally, they become frustrated and irrational. And when they become frustrated and irrational, they create more problems they also cannot solve. This is a vicious cycle creating more chaos. The program I have developed will help to break these vicious cycles.

This violates most of the criteria that investors look for in a start-up. The number of users would be small, but very valuable. By charging by the number of uses collaborating to solve the problem times the period of time they use it, it would undoubtedly payoff 10 times the investment. But it would probably take more than 18 months to get that payoff.

Someone might accept the extended payoff time to see the social advantages. We will have to see.

Contact me at steward@problematics.com for more information.

Jennifer Fortney 20+ years’ experience in PR & marketing comms; Founder of Cascade PR, Chicago firm for small business & startups.

July 17th, 2015

It sounds to me that a little more research needs to be done. You never want to go before an investor without 100% confidence in your model, and most importantly to them - your Revenue Model. 

To be honest, while user is important, ultimately they should provide the revenue model. Without users you cannot drive strong ad revenue however we're so inundated with ads that people have stopped paying attention. It's no longer as strong a revenue model as it used to be. 

Ultimately all investors care about is "what's in it for me" and "how fast can I make my money back?" Those who get pre-rev investments is .001%. Sure we see stories in Inc, etc. but this the number of businesses that get funded pre-rev or off an idea is such a small % of businesses that I feel it falsely gives others hope. The truth is that these companies and their founders have worked their boots off putting together a great company and model, and put in the time to network and fund raise. The misconception I see is that the funding comes easily. In reality it can take months and years to get a seed round, let alone a Series A round. 

If you have an idea, put it together and practice by opening a Friends & Family round to provide funding to get you up and running. By nature, you're going to be more determined that you create a rev model that is going to produce returns because you don't want to leave friends & family out of their money. They make you work harder, and this is one of the many reasons this the preferred first round after your own investment.

Hope this is helpful!