How startups fill the gap between revenue and investment


finding a treasure in the desert sand
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Joe Procopio


Joe Procopio is a multiexit, multifailure entrepreneur. He is the founder of Teaching Startup and the COO of Precision Fermentation. His exits include Automated Insights and ExitEvent.

More posts from Joe Procopio

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. 

Remember: the easier the path, the lesser the payoff. 

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. 

Don’t waste your time. Your startup is probably better than that. You just need to prove it.

The not-so-easy-path: find a rich person

If you do indeed have that $10K to $100K in annual revenue, especially recurring revenue, the good news is you’re right in the sweet spot where rich people like to invest. These people usually take the form of angel investors.

And again, if you don’t have revenue, harder path, keep reading.

Angel investors are people with a lot of private money who are looking for returns that they’re not likely to get in the public markets. They’re willing to put up $10K to $50K to $100K or more into a business that’s just starting to take off and shows a lot of promise. They’re thinking that if they get in early enough, that 100x valuation is not only possible, but it might just be a stepping stone on the way to a very, very large return. 

Now here’s the tricky part. Angels, as the name would suggest, are hard to find. They like to work behind the scenes. They each have a unique thesis and their own set of investment requirements. A lot of those requirements might be personal. You can spin your wheels forever with an angel sometimes and get nowhere.

Another caution is that angel money is expensive. You’ll give up quite a bit of equity for their investment. Makes sense, they’re taking the most risk.

A final caution, and this is true of any investor, is that they make things harder. If you think of your business as a treadmill, when you take angel or any other outside investment, you’ve put your treadmill on an incline and you’ll have to keep increasing that incline to survive.

What I mean is this: like any other investor, angels are going to want you to use their money to put the accelerator to the floor to increase your revenue by 10x to 100x in three to five years. But angles ALSO want you to use their money to shape your company into something more investable so that you can start taking follow-on investments from other angels and VCs.

A lot of times, these two strategies can get real incongruent real quick. 

The path less taken: corporate investment

I’m always shocked at how rarely startups consider corporate money. This is a strategic investment for both sides in the name of exploring a potential acquisition. It doesn’t necessarily mean your startup will be acquired by the corporation, but it definitely puts the option on the table.

What’s the drawback? It’s limiting, in a lot of ways. I’ve turned down corporate investment that would have fenced off my startup within a single market, ultimately forcing it to a much lower valuation and potential return. It sucks to say no to money, but it was a defining crossroads for our company which worked out in our favor a few more years down the road.

Caveat: when we turned down the corporate money, we almost didn’t get the VC money we were looking for, and ended up about three weeks away from shutting down before the first wire transfer hit our bank. That’s what risk is sometimes.

Corporate investment can be limiting in other ways too. Corps usually only invest in about the 10–20% range, meaning you’ll have to fill out the other 80% of the round with VCs, angels, or other personal investment. They definitely take much longer to invest. And as you might imagine, they’ll be looking for direct alignment with their own offerings. That not only limits your market, it can limit your offering.

The hard path: customer investment

Have you ever loved a product so much that you were like, “I wish I had invested in this?”

If you’re a B2B startup and you have customers with deep pockets, and some of those customers LOVE your product and can’t live without it, there may be a win-win here.

Maybe one or more of those customers could put up the money to fund a developer to finish out that list of features that’s going to separate you from the competition. You have lots to give them in return, starting with free and expanded usage of your product (consider part of their investment a lifetime subscription to the highest of enterprise tiers). You can also give them early and unlimited access and input on new features, extended support, whatever they need. 

You also give them an equity share in the company, which turns a customer relationship into a partner relationship. It’s good to have partners, but keep in mind this type of investment can be limiting too. You’ll always have VIPs at the front of the line whose needs might start to diverge from the rest of your customer base. 

A lot of entrepreneurs will read “customer investment” and immediately start to think about crowdfunding. These are two totally different types of investment, so don’t mistake one for the other. 

Here’s what happens when you decide to sell your startup

The hardest path: use revenue to grow piece by piece

The hardest growth path is building the company by diverting all or most of the profits to building the next feature. 

You figure out where the low-hanging fruit is, in other words, what the most existing and new customers will pay more money for the quickest, and you build that next and release it quickly and with low automation. When it starts to stick, you fortify it and move to the next feature.

I’m a customer-first entrepreneur, and in almost all cases, I’d rather build my startup on revenue rather then outside funding. If you do this, the future of the company is yours, and you’ve got a much greater chance at success. 

That said, I’m also a realist. Building via revenue comes with certain unavoidable requirements:

  • You have to be right, every time, about which feature will produce more revenue.
  • You have to keep a constant eye on margins, customer retention, and cost of conversion.
  • You and your company and your early employees will be living paycheck to paycheck for an indeterminate length of time.

If you can do this, you can step backwards through each of the easier paths that came before it and now you’ll be in a much stronger position to bring in more investment, at higher valuations (or lower, depending on your strategy), and give up much less ownership. 

This path is risky, it’s difficult, and it will definitely keep you up many nights wondering if you’re going to make it to the end of the month. But like all difficult paths, when you take it, the payoff can be much more rewarding.

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