Business advice from a young entrepreneur: Why revenue matters
Startups' new columnist James Gupta, the 25 year-old founder of Synap, says it's time for start-ups to stop using 'vanity metrics' - after all revenue is something you can't cheat...
James Gupta is a 25 year-old serial entrepreneur. Juggling business with university studies, Gupta is the founder and CEO of AI-powered education platform Synap and a final year medical student at Leeds University. He sold his first business, taxi app JumpIn, to Addison Lee for £180,000. Every month, Gupta will be sharing his business advice, lessons and reflections on starting and growing a successful business. In his first blog for Startups.co.uk, Gupta argues the case for start-ups to focus on generating revenue – the metric which “really matters”….
Is revenue important for an early stage start-up?
It’s a debate that’s been going on in the start-up community for years and, even if there is a correct answer, I don’t think I’ll be the one to put it to bed. However, as someone whose company recently made the jump from pre-revenue to revenue generating start-up, I have a few thoughts on this…
The freemium business model – a financial tightrope
The internet has dramatically lowered the cost of operating a business, to the point where acquiring non-paying users at huge scale actually can make a lot of sense.
“It can be very tempting to use ‘freemium’ as an excuse to avoid answering difficult questions”
The CEO of Evernote, Phil Libin, summed up its freemium business model well when he said “the best way to get a million people paying, is to get a billion people using”. If you were the CEO of Mercedes, that would be an obviously insane suggestion; the marginal cost of producing an extra car, let alone 1,000 extra cars and giving them away for free, in the hope that one person might pay for an upgraded model, rules it out completely.
On the internet however, it’s different. Once Evernote is already up and running, if 1, 100, or even 1,000 extra, users want to sign up for free, the marginal cost is – for all intents and purposes – zero.
There is a lot of sense in this approach, but start-up founders need to be careful. It can be very tempting to use ‘freemium’ as an excuse to avoid answering the difficult questions we need to ask about our business model.
Say goodbye to vanity metrics
“Revenue is a solid ‘north star’ metric to measure your business’ overall growth by”
It’s also very easy to fall into the trap of using superficial ‘vanity metrics’ that sound great at presentations – like website hits or downloads – rather than metrics that actually measure the value your business is delivering to people.
Revenue, in our case, has made what we do feel much more tangible. The fact that someone is willing to pay X amount for the thing your business is offering, in one fell swoop, validates your business model. On the other hand, you may have 10,000 people using your product – which would be a very positive sign – but you still don’t know whether they’d be prepared to pay for it.
“As a revenue-making start-up, we’re in a much better position with potential investors”
From a financial perspective, we’re in a much better position with potential investors too. Like most tech companies at our stage, we’ll be looking to do a Series A investment deal in the near future. Now that we’re at least covering our costs each month, we have much more freedom to negotiate on deals and, if necessary, turn down offers until we find the right one for us.
Finally, revenue is a solid ‘north star’ metric to measure your overall growth by. Of course there are other metrics you should still pay attention to, but revenue is something you can’t really cheat.
“If someone hands over their money for your product/service then you’re doing something right”
People will visit your site by accident, other people will post spammy content. If your website hits or posts go up by 20% in a month, then that might be a good thing or it might just be noise but people take much more care before parting with their own money. If someone hands over their money for your product or service, then you’re doing something right. If revenue grows by 20% in a month, then you need to do more of whatever your business is doing – plain and simple.
Raising funding without a paid offering, is it a double-edged sword?
Living in an age where it’s possible to reach thousands or millions of extra users for a negligible marginal cost has enabled entirely new models of business. As a start-up, it can be a powerful way to grow and validate your idea.
It’s entirely possible to raise several rounds of investment without a paid offering, and to focus on revenue at a later stage of development.
“Even if a premium offering doesn’t generate huge amounts of revenue, it makes your business far more attractive to investors”
However, this approach is a double-edged sword and it’s important to tread wisely. Successful freemium businesses generally need at least a 2% to 5% premium conversion rate to be viable. As such, once you have a thousand users, it’s probably well worth considering adding a premium option.
Even if it doesn’t generate huge amounts of revenue for you, if you can prove that a given percentage of your free users will convert to paid subscriptions, then you’ve just taken a huge amount of risk out of your business, making it far more attractive to investors.
“If you run a free business, I’d recommend adding a premium option sooner, rather than later”
In our case, making the jump to premium subscriptions has helped to focus our business model and marketing activities, as well as validating our riskiest assumption.
If you run a free business and have been considering adding a premium option then, based on my experience, I’d recommend doing so sooner, rather than later – you might be pleasantly surprised at the results!