In world of startups, revenue kills

“You learn a lot once you start down the revenue path of a startup. One of the first lessons is that no matter how big you get, next quarter you have to be bigger. No one cares if you’re generating $50M or $100M per year. What matters is how quickly you’re growing quarter over quarter and year over year” Seth Sternberg, co-founder, Meebo

Having revenues means having a business, which also means you are valued on your revenues and your ability to grow revenues. If you as a startup have revenues, then you can no longer command any ephemeral valuation for your company — your investors need to show how they are valuing your business. Unless of course you are Dropbox, Uber or Airbnb who are bringing in a ton of money and are valued based on those revenues.

As an investor, it is hard to justify a multi-billion dollar valuation (to your partners or limited partners) when your are investment is bringing in only $10 million a year in revenues. So from that perspective, revenues, tend to muddy the picture. Sadly, that is the reality of the post-Silicon Silicon Valley!

Responses

  1. Sajith Pai (@sajithpai) says:

    October 28th, 2013 at 5:27 am Reply

    There was also an old NYT Nick Bilton article which covered similiar ground – http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ – there is a wonderful term in that article – mark to mystery!

  2. Semil Shah says:

    October 27th, 2013 at 11:26 pm Reply

    It could also be the rate of the free cash flows. For instance, a company like Square may be making revenues, but also losing money on processing fees, but the processing volume may be so high and growing in a certain direction that investors can model out scenarios by which, at a certain point in the future, the free cash flows result in not only profit, but high-growth profit. I’m guessing you’re alluding to Pinterest and SnapChat. With Pinterest, which is already the #13 ranked site in the U.S. (Alexa) and rising, there is already strong evidence that Pinterest is leading to e-commerce transactions. The traffic is so high that having revenues doesn’t even matter – the chance that they won’t make this turn is now lower than if they will come through. With SnapChat, which doesn’t cost much to run, there’s as many pictures shared on there in a day as there is on Facebook’s entire network (~350M/day), and there are ways to capture all sorts of metrics from mobile interactions that aren’t possible on the web or in Facebook’s framework. The brand is also valuable. So while SnapChat “could’ have been monetizing, it’s secondary to making sure the growth maintains and then locks-in. After then, the valuation talk is moot.

    1. Om Malik says:

      October 27th, 2013 at 11:34 pm Reply

      Good comment Semil. Thanks for sharing.

    2. takingpitches says:

      October 28th, 2013 at 5:30 am Reply

      Is the theory with Pinterest/Snapchat that if you have Facebook/Twitter type growth (or even beyond), it is clear based on FB/Twitter’s history that you can overlap an advertising model on top of that user base that will at least support a 3.5 billion valuation and potentially much beyond?

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