How startups fill the gap between revenue and investment
I get tons of inbound from entrepreneurs and founders, from first-timers with an idea to CEOs with millions in annual revenue, and they all ask what basically boils down to the same question:
“I’ve taken my startup this far, how do I get the money to take it to the next level?”
In 20 years of building companies, roughly half of our companies have taken some form of investment to go after a much larger payoff than our existing revenue would allow. It wasn’t something we celebrated, it was something we felt was mandatory. In other words, there was no other way and outside funding became our best hope.
When you have revenue and you chase funding, you should know what you’re getting into and you should exhaust every other avenue before you decide that someone else’s money is a better bet than your customers’ money.
The easiest path: venture capital funding
I know it’s heresy to talk about how easy it is to raise money. It’s actually not, and I’ll be the first to admit it: your odds are poor, it’s going to take all your time and energy, and you’re going to be beholden to a bunch of people who have a different vision of your idea than you do.
But if you need scale money, this is the only shortcut.
Now, I say “scale money” because you should only be seeking VC money to scale your business, not establish it. The odds of getting funded for an idea with no current revenue and no current growth are infinitesimally slim.
So let me start with some truth for the earliest of early-stagers. You’re going to have to walk a harder path, so keep reading.
If you do have revenue, the first thing you have to show a VC associate, the gatekeeper of the firm, is how your existing revenue is going to grow 10x to 100x over the next three to five years. This is standard VC math.
I’ll leave it to others to debate the logic and/or fairness of the process. My point is that you can put any multiplier you want on zero revenue and the result will still be zero. Even if you’ve got $1,000 in monthly revenue, then that’s about $10,000 in annual revenue, and at best, at 100x, the investor is thinking you might be worth $1 million if all the stars align.
Most VCs won’t touch a valuation that low unless you’ve got a track record. If you don’t, you’re kind of wasting your time putting a deck together.