This slide is actually kind of a fallacy, almost a joke, because what usually happens is a longer-than-expected period of stagnant or even negative growth. Then leadership runs it all back — doing the same thing and expecting a different result.
The classic definition of insanity.
It’s not enough to show that idea + investment = growth
Obviously, a startup can’t just will its way to exponential revenue growth. You can’t wish your way to profitability. You can’t spend your way to scale.
But that magical hockey stick chart is the critical ingredient for return on every single investment in a startup. So it’s a Catch-22. Every investor will expect you to have developed a revenue growth plan that every investor will be maximum skeptical about.
These are the most damning questions I usually have to answer about my revenue plan. They’re the ones for which I do the most research and the ones for which I prepare the most well-constructed answers. They’re also the ones I ask first when I advise a startup, and they’re the ones that are usually met with the silence from the founding team.
Let’s attack that silence.
What happens when the bubble pops?
Why you’ll get this question: Every market is a fluid thing. Market shifts, or changes in the adoption of a type of product, are what fuel revenue. Market trends, the consolidation of those little shifts across a wider market, are catalysts for revenue growth. Market evolutions, or the ability to exploit inefficiencies and imbalances in those changing markets, can create massive business opportunities.
Here’s the problem: Market shifts, market trends, market evolutions, and market bubbles all look like the exact same thing at the beginning.
For examples, you can look at electric vehicles, digital currency, and virtual/augmented reality as markets that have trended up, down, and sideways over the last 10 years. Those market shifts produced small and large bubbles that popped all over the place and took out small and large players alike when they did.
How to attack the answer: Habits change a lot more quickly than we see and feel in the mainstream. The consumer and business public are usually only aware of the type of massive tectonic shifts that create market earthquakes, not the little rumbles that create market tremors.
No one can accurately predict the future — not you the entrepreneur, not the investor asking you to do just that. Your revenue plan will need sensors, warnings for those tremors, so to speak. And your business model will need alternate plans to be able to react to those warnings.
So if you’re targeting $1M in revenue in year one, you’ll need to know if your market assumptions are on target early, by month three, not month 11. Bubbles don’t appear out of thin air. They start small and they grow over time. Investors want to know that you won’t get caught unaware that your startup is suddenly being built on a bubble.
What happens when your cash cow dies?
Why you’ll get this question: Generally, when a startup is in a position to seek investment to accelerate its business model, it’s because that model has been successful with at least one opportunity that is more than just an incremental step in revenue growth.
This could be the closing of a single massive customer, a partnership deal with a major corporation, riding the wave of a hot third-party technology (like Slack or Zoom), or even an external factor that suddenly opens a new, untapped market.
Here’s the problem: A business can’t thrive off one customer, no matter how large and deep-pocketed that customer may be. Corporate partners won’t support startup companies indefinitely. A single change in a third-party foundational technology can make your product useless, or at least less valuable. And untapped markets don’t go unnoticed for long. If a major corporation steps in, they’ll outspend you into obscurity.
Zoom provides an example for almost all of these issues in one way or another. A huge beneficiary of the quarantine, Zoom soon found itself fending off Microsoft and Google as those companies quickly poured a ton of resources into video conferencing. As the external catalyst of the quarantine ends, another huge market shift is taking place, and Zoom (along with any startup that built off the back of Zoom) will be forced to conform to the new new normal.
How to attack the answer:
Develop a plan that shows, as quickly as you can, how you'll turn a single win into multiple opportunities.
If it’s one big customer, you’ll need to have your learnings from that sale baked into a repeatable sales process, plus a hit list of dozens or hundreds of doors you’re already knocking on to repeat that sale.
If it’s a partner, you’ll need to be able to define the competitive moat that will keep that partner or anyone else from being able to do what you do, both in terms of quality and cost.
If you’re riding someone else’s technology wave, you should be raising investor money to build your own technical infrastructure, or at least have the outline of a formal partnership in place with that technology company. But eventual independence from that technology partner will always be mandatory to an investor.
For an untapped market, but you’ll need to use the momentum of the revenue you generate in that untapped market to make your company attractive to other, more established markets while everyone else rushes for the new market customers.
What happens when you have to go to war?
Why you’ll get this question: Most revenue plans and hockey stick growth charts are built on the premise that everything will continue to go as well as it’s going today.
Sure, some of the wilder assumptions you’ve made may not come to fruition, but you can probably show that your revenue model will survive even if some of the bigger breaks don’t materialise. As long as you operate the way you’re operating today, you can wait for that catalyst indefinitely.
Here’s the problem: It’s not getting to the next level of growth that might kill you, it’s the expectation that you’ll stay at your current level of growth. There’s no such thing as a steady state in a market or a business model. You’ve probably tried to think of everything that could go wrong, but you haven’t, because it’s impossible.
We’re all aware that the pandemic caused a lot of economic damage in some sectors, while others remained untouched or even benefitted. What might not be as apparent is that dividing line went even deeper than just by sector or by industry. Companies within the same industry that had economic cushion and leverage survived, companies that did not, did not.
How to attack the answer: It’s not just a global crisis that can send you into survival mode. It could be increased competition from new entrants, or a shift in an industry that reverberates down to your business, or even a loss of key talent within your own company.
It actually doesn’t matter what the problem is, the solution is that cushion and leverage.
The cushion is in your margins. One of the more frequent mistakes I see in a startup’s revenue plan is an insistence to keep margins low to attract more customers to get that hockey stick growth started more quickly. It’s like they want to get into a price war with themselves on purpose.
When everything is going right and as planned, a startup’s margins should be high, so that when something goes wrong and a startup has to go into survival mode, they’re not automatically forced to bleed runway to survive.
In terms of leverage, if a startup knows their cost to acquire a customer (CAC) and the lifetime value of that customer (LTV), they also know how much those numbers can be adjusted temporarily to make the decisions they need to make to increase their chances of survival.
If you need to spend more to defend your market (CAC) or offer more value to keep customers longer (LTV), you’ll be able to survive any crisis temporarily.
Your product is real, your revenue plan should be too
In a previous post, I talked about all the things investors will want to know about your product. Some of those same concepts can be built on to prove to investors that you can also sell the product, quickly and in large quantities.
Anyone can show how revenue growth can scale over time. And honestly, almost anyone can create a list of assumptions to make that hockey stick chart seem like a foregone conclusion. But growth is not a passive exercise, it takes constant planning, executing, and adjusting to make that growth chart a reality.
This article was originally published on Medium by Joe Procopio
Joe Procopio is a multi-exit, multi-failure entrepreneur. In 2015, he sold Automated Insights to Vista Equity Partners. In 2013, he sold ExitEvent to Capitol Broadcasting. Before that, he built Intrepid Media, the first social network for writers. You can read more and sign up for his newsletter at www.joeprocopio.com
If you want more direct advice and answers, look into Teaching Startup.
