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By Samuel Ajiboyede – The Entrepreneur’s Diary
Have you ever wondered how some startups can secure investors in millions of dollars, even when they are not yet profitable? Do you sometimes wonder why there is so much hype around the revenue, and sometimes, no one asks about profits? Well, this will help you understand why Revenue seems to take the Center Stage when it comes to Tech Investments.
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The familiar buzz phrase: “revenue over profit” is a mantra that often perplexes budding entrepreneurs and seasoned business managers alike. Anyone with essential business knowledge wonders why investors would be interested in a business with only revenue but no profit. Here are some reasons why.
Revenue=Cashflow
Revenue, simply put, is the lifeblood of any business, especially startups. It’s the money generated from selling products or services. While profits represent what’s left after subtracting expenses from revenue, revenue is crucial for several reasons.
1. Proof of Concept
Revenue is tangible evidence of a demand for your product or service in the market. It validates your business model and shows everyone that there’s a market out there for what you are offering. Revenue demonstrates that customers are willing to pay for what you offer. For startups seeking investment, a solid revenue stream can be a powerful validation tool, showing potential investors that your venture has market viability.
2. Fuel for Growth
Revenue provides the necessary capital to fund operations, invest in innovation, and scale the business. It enables startups to hire top talent, enhance product offerings, expand into new markets, and ramp up marketing efforts. Without a steady stream of revenue, it’s challenging for startups to sustain themselves, let alone grow and thrive in a competitive landscape. Even if you are not yet turning a profit, if you have revenue, it means you have some cash flowing in, which can serve as operations capital while you await the injection of more funds.
3. Customer Feedback Loop
Revenue is a product of purchases and transactions, and each transaction generates valuable data and insights about customer preferences, pain points, and behavior. By analyzing revenue trends and customer feedback, startups can refine their offerings, improve user experience, and tailor their strategies to meet market demands better. In essence, revenue acts as a feedback loop that informs business decisions and drives continuous improvement.
Investor Perspective: Why Revenue Trumps Profits
Now that we’ve established the significance of revenue for startups let’s explore why tech investors often prioritize revenue over profits when evaluating investment opportunities:
1. Growth Potential
Tech investors are typically drawn to startups with high growth potential. While profits are essential for long-term sustainability, investors are more interested in a company’s growth trajectory. Rapid revenue growth indicates scalability and market traction, key factors driving investor interest. An investor can choose to invest in a startup with rapid revenue growth that has already achieved break-even and ignore one with a small but steady profit margin.
Even if there is no current profit, revenue tells investors that there is a product here that people want. With a bit of tweaking on the price or streamlining the production costs, the business can become profitable. A small and stable profit can even indicate to investors that the business has reached its peak and so has no growth or exit potential for investors.
2. Market Dominance
The tech space is hyper-competitive, and often, speed is of the essence. Investors understand that capturing market share early on is critical for long-term success. Startups prioritizing revenue growth can outpace competitors, establish themselves as market leaders, and create barriers to entry, making it difficult for new players to gain a foothold.
3. Valuation and Exit Opportunities
When it comes to valuing startups, revenue growth plays a significant role. Higher revenue figures translate to a more attractive valuation, which benefits both founders and investors. Additionally, a robust revenue stream enhances the likelihood of successful exit opportunities, such as acquisitions or IPOs, enabling investors to realize substantial investment returns.
4. More likelihood of profitability
Now, let’s get real. If you don’t focus on getting revenue first, you will never turn a profit. And a startup that has a revenue already is more likely to become profitable soon than one that is still at the ideation stage. So, if you pitch to investors and they are bent on knowing your revenue numbers, don’t blame them.
The Balance: Profitability Matters Too
While revenue growth is undeniably significant, it’s essential to recognize that profitability ultimately determines the sustainability and long-term viability of a business. Profits ensure that a company can cover expenses, reinvest in growth initiatives, reward stakeholders, and weather economic downturns.
Moreover, sustainable profitability is a testament to the efficiency and effectiveness of a business model. While rapid revenue growth may initially overshadow profitability concerns, investors ultimately seek companies that can generate sustainable returns over the long haul. So, if you can become profitable before seeking investors, it is better for you.
If you have become profitable, you may not even need investors.
The Bottom-line
Profitability is the ultimate indicator of a truly sustainable business, but revenue is a good start, too. So, if your business has only gotten to the revenue stage, don’t panic. It means you are doing something right first of all. Now, you must figure out how to get from revenue to profit.
Samuel Ajiboyede – Entrepreneur | Investor | Branding Expert | Author & Host of ‘The Entrepreneur’s Diary’
COVER PHOTO iStock
