You revenue plan really matters. It means you can establish independence from your VCs.
I write this because one of our very young portfolio companies is about to achieve a major milestone: it will beat its revenue plan for the year. The numbers are small, but to our group at Kepha, that is a major step in company-building.
You see, many start-ups are very good at projecting costs, but we think it is really hard to project revenues. The former requires understanding your business milestones over time, the staff needed to achieve those milestones, and the ability to recruit awesome people. All that is difficult.
However, it is much more difficult to project revenues. That’s because you have much less control. If you have a B2C company, you really need to get a handle on customer-acquisition costs by channel over time. What is the return on SEM? With multiple changes to the Google algorithms, what is SEO doing? Can you count on free PR through a great TechCrunch article?
Is there virality happening in the user base, and if so, how much and how does it vary by cohort and various consumer profiles? Very important: how do we change the mix of consumers to our most desirable users?
Then, you eventually will have to get a grip on monetization. What is the churn? If a free-mium pricing model, what percent will convert to a paid product? How elastic is the demand curve (i.e., when is price high enough to dampen interest)?
A similar dynamic exists with B2B models.
So, we’re always very happy when a company can accurately forecast and achieve its revenue plan. It suggests that the team really is getting a handle on “the business of the business.” And, it lets the company better manage its cash consumption and financing needs.
It is tough when a company consistently misses its revenue plan, which creates an earlier out-of-cash date, which means it must hit the VCs with a weaker story.
It is great when a company has a predictable and scalable revenue model. It then controls its own destiny rather than existing solely on the largesse of investors. It has revenues, in-bound cash flow, with which to pay the bills, and it can choose to slow growth to hit profitability–or, up the burn and go for growth if the market is offering big rounds at huge prices. In other words, the founders have optionality. They can raise money or exit only at terms that they find attractive.
As I’ve long believed, it is one thing to build a product. It is much harder to build a company.