For any startup, generating that first dollar is a huge milestone. Revenue signals to investors that a company is helping to solve a problem in the market, and even more importantly, that people are willing to pay for that solution. If you are an entrepreneur that has reached this point, we truly applaud you—many startups never make it to this stage of the game.
From an investor’s point of view, revenue is the single most important measure of traction for many startups—especially those that rely on a first-mover advantage. It’s often an extremely helpful barometer for how quickly a business can grow and scale.
In fact, since it’s such a vital indicator of a business’s long-term prospects, we generally take a deep dive in determining where revenue is coming from and how predictable it is when we are considering an investment. Because while all revenue is important, not all revenue is equal in the eyes of investors.
Recurring vs Non-Recurring Revenue
There are two basic types of revenue—recurring and non-recurring.
- Recurring revenue is money that is coming in predictably and has a high probability of existing as a stable revenue source in the future. Software-as-a-service companies or other startups that charge a monthly subscription fee for a service or product are good examples of recurring revenue.
- Non-recurring revenues are dollars that are not predictable, such as one-time consulting services or a single product sale to a customer without any long-term contact.
Many investors favor recurring revenue because it allows us to project future growth more easily (hint—VCs love fast-growing companies!). However, non-recurring revenue is still revenue. In fact, some business are simply not structured in a way that allows for a recurring revenue model and that’s something a savvy investor won’t ignore.
It’s All About Predictability
Ultimately, an investor is taking a stake in your company and wants to see you grow and scale to a successful exit. Predictable revenue is the best indicator that you will be able to accomplish this goal and it also provides an excellent indicator of how quickly you can do it.
Recurring revenue has a certain level of predictability built right in, and paying attention to important statistics such as customer churn rate can help you make that revenue even more predictable in the future.
Meanwhile, startups that rely more on non-recurring revenue may not have the benefit of monthly subscribers, but they can still demonstrate predictability by showing a consistent cadence of repeat purchasers, or setting realistic financial forecasts and then nailing those forecasts on the dot.
Bottom line, all revenue is important and the more predictable your revenue stream, the better. And as always, building a successful business always starts with being honest with yourself, and your potential investors, about where you are and where you want to go.
To learn more about JumpStart’s investing criteria and see all of our various funding options, click here.