Why revenue now really matters?

To anyone outside the early stage technology startup sector, this question would be met with utter disbelief - doesn't revenue always matter? 

In early stage technology companies, this one goes in cycles. The right answer for is based on the convergence of the problem you're solving, who your customer is (ie: who pays you money), and where the capital markets are at in their cycle.

Last week I went to the Muru-D investor night and the quote was 'it was so great to see every startup had revenue, there were no "fluffy" vanity metrics'. If I'd said that a couple of years ago I may have got some feedback that I didn't understand the sector - timing really is everything. 

It was the statement, and also where it came from, that suggested the cycle has converged on 3 fronts. 

So what's changed? 

The problem you're solving

Google, Facebook, Twitter, Instagram, Snapchat & Whatsapp - they're all high profile names and all of them have millions of users who don't pay them a cent. 

If this is your model, that means those users are not customers as they don't pay you money.

Your platform is valuable because it creates an engaged audience to whom you can advertise or collect targeted data that allows others to advertise. All of these names have revenue and the bulk of it is advertising revenue. Hence their customer is the advertiser. 

From 2000 - 2013 the bulk of high profile tech startups that "made it" followed this model. 

At the same time, there's been a plethora of business management apps appear, that charge on a subscription basis. To gain trust, they used the "freemium" model where you get people to sign up for a free trial then convert to paid. 

For business mgmt apps, they've had to play in a space where users expect anything online to be free (SME owners are also consumers). Atlassian's way of dealing with that was genius by tapping into a very connected community. Xero did it by substantially improving the experience of doing something you have to do as a business owner.  

Tech startups are now starting to explore IoT (internet of things) where the tech is part of the manufacturing process, big data (that can come from the connected devices), very high quality rich freeform data as part of artificial intelligence, financial services, health tech, etc etc. The changing nature of the problem being solved changes the position revenue needs to have in your business model. 

Who your customer is

In the early days of the web, the advertiser was not the user of the service. That is still the case today. However, it is the advertiser who's the customer as they're the one paying money. 

The areas technology are now exploring are much higher end, higher risk and substantially less price sensitive (especially in how they're being delivered today). The users of those services today are used to paying for them and the quality of their experience today is often very poor hence creating the potential for disruption.

Hence it makes sense that revenue becomes a far more important measure of traction & trust in a new way of solving these problems in a way that your market finds valuable. 

The capital cycle

This may be the biggest driver. 

Up until December 2015, in the US in particular growth was everything. Nothing else mattered, especially if you wanted to get funded. The number of unicorns that appeared in 2014 / 2015 also meant that unless you had the potential to get a $1B valuation, cutting through the noise was extremely difficult. 

In January 2016, the capital markets experienced a major correction. The drivers behind this had nothing to do with the technology sector - however, given tech assets are considered high risk, investors inevitably flee for "safe havens" and tech stocks are not in the list. Tech stocks took a hammering. 

Due to the perception that the valuations experienced in 2014 / 2015 are not sustainable and due to general investor nervousness, a lot of the capital that was being invested in technology companies has pulled back for now.

Good companies that can show good revenue traction, efficient customer acquisition and good growth potential are still getting funded. If anything, the reduction in money supply may reduce the level of "frenzied noise" - there's less deals being done however that may in itself provide a natural filter. 

The other issue, of course, is that if you have revenue, and sufficient revenue to keep growing at a reasonable pace, you are no longer as reliant on capital raised to fund that growth. That is a much stronger position to go into any capital raise discussion. 

I will always tell you revenue is important. At the moment it turns out a lot of the world agrees with me :).