Does Revenue Really Matter?

Does Revenue Really Matter?

Every business needs to make money—certainly, every for-profit business does. The question is “by when?” Most businesses need to make it from the get-go or, at least, before the owners run out of money. This would be typical of a “bootstrapped” business, which survives and grows from its own revenues.

Financing and particularly, for example, investor funding makes it possible for a business to put off the day when those revenues need to come in. That extra time can be used for market studies, product development, and so forth. It can also be used to acquire marketshare. Think about a restaurant or retail store that has a grand opening sale at which it reduces prices — and, thereby, delays revenue — in order to gain initial marketshare.

Software businesses and, particularly, Internet businesses can take this to a greater extreme. Unlike, say, a restaurant, a dry cleaner or other brick and mortar business, which might have a potential market that is limited to the local and surrounding towns, the market for an Internet business is, potentially, worldwide. Moreover, with products that are made up of digital bits and bytes, the incremental cost of producing and shipping can be quite low for a software or Internet business. So if we think about delaying revenues, you could imagine how an Internet business might really be able to grow market share through a “grand opening sale” of sorts— that is, by charging little or nothing during its initial months or years of operations. Think of it as a “landgrab” as against other entrants into the marketplace.

Unfortunately, it was this logic that led to some real excesses that we now know of as the "Internet bubble." In the late 1990s and early 2000s, there was more than a bit of the “goldrush” mentality. The Internet was new and growing, as were potential markets in China, India, and elsewhere. At the time, the opportunities seemed boundless and if you are an optimist with money to invest, it was hard to resist the craze.

Whether it was a result of banking deregulation, the push to lower mortgages so that every American family could buy a house, or whatever, there was just too much money “in the system,” back then. People were willing to throw investment dollars not just at proven businesses but at any start-up that presented the possibility of being a business. The excess of investment dollars induced investors into some pretty hazy thinking.

And, then, there was the theory of the “greater fool.” It goes something like this: Why should an early investor worry about whether any particular start up could make it in the marketplace, if there was likely to be a subsequent investor or acquirer who would buy the business at a greater valuation—regardless of whether the business truly had legs.

Taken together, these presented a perfect storm, of sorts, that led to the rapid growth and even more rapid collapse of the bubble.

Since then, the government has tried to put in place laws and regulations aimed at curbing some of the root causes of the excesses of the era. Whether those will prevent a future bubble is another question entirely. The fact that we arent in one now (or are we?) may simply be because people either have or are willing to invest and theres less “irrational exuberance” to energize growth of a bubble. The result is that, today, investors seem to be more critical and are, more often than before, requiring that startups prove that they have or can more readily attain real revenue.

So for the startup that wonders whether revenue really matters, take to heart that a viable business plan remains a must-have if you are looking for investment funding. That plan needs to include a path to revenue. Must the startup have actual, current revenues to attain that sort of funding? Well, current revenues are a plus but they are not necessarily a dominant factor. After all, for example, a so-called lifestyle business that has current revenues but has no possibility for real growth may not be attractive to investors at all.

Listen to a podcast on the subject at: http://www.mitforumcambridge.org/news/software-revenue/ and, if you are in the Boston area, join us for a live discussion January 31, 2013, on the MIT campus. Register at http://www.mitforumcambridge.org/events/software-circle-event-does-revenue-really-matter/.

(c) Copyright David J. Powsner 2013.

With thanks to Randy Cronk of greatwriting.com and the MIT Enterprise Forum of Cambridge for motivating this discussion.

Category:general -- posted at: 7:35am EST
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In this session, we are pleased to present excerpts of a recent panel discussion BIG DATA offered by the MIT Enterprise Forum Software Entrepreneurship Special Interest Group in connection with the Tufts University.  The panel discussion was held on October 25, 2012,  on the Tufts  campus in Medford, Massachusetts

Our panelists were David Dietrich and Jeanne Hopkins.   David is advisory technical education consultant on big data and data science for  EMC Corporation, where he recently co-developed that company's first course in those areass. David has been involved with data analytics for nearly 20 years. Prior to taking on his current role at EMC, he managed a line of analytical software products for regulating the US banking industry, and developed Software-as-a-Service and Business-Intelligence-as-a-Service offerings. He’s worked with many Fortune 500 companies, and collaborated with the U.S. Federal Reserve to develop predictive models for monitoring mortgage portfolios.

Jeanne  Hopkins is chief marketing officer executive vice president of Smartbear Software.  She also authored“Go Mobile,” the #1 best-selling mobile marketing book on Amazon. She has expertise in data-driven on-line marketing. Jeanne’s background is in customer acquisition expertise across channels including SEM, SEO, Email, Display, Affiliate Marketing, Facebook, Retargeting, Customer Referrals, and Partner Marketing.  Prior to joining SmartBear, Jeanne was vice president of marketing for Hubspot, where she was responsible for creating and converting organic and paid demand into 50,000+ new sales-ready business opportunities for the team of 100+ Inbound Marketing Specialists.

The moderator for the program was Shirish Ranjit, a recovered entrepreneur and now software developer with the MIT Lincoln labs. Organizers for the program, in addition to Shirish, were Mark Thirman, former founder and CEO of Air Print Networks and, now, a director of partnerships  for Vodafone; Vineet Sinha and Chris Deschenes, both of Architexa, a software solutions provider where Vineet is founder and CEO and Chris heads up  business development efforts; Sanjay Manandhar, founder and CEO of Aerva, a digitale signage technology company; and yours truly, David Powsner, an intellectual property lawyer partner with the law firm Nutter McClennen Fish.  

Direct download: Big_Data_is_Not_Just_For_Big_Business.mp3
Category:High Tech Entrepreneurship -- posted at: 9:43am EST
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