Lesson 1: Sales Cures ALL Things

Sales Cures ALL Things

One may think that when you’re fundraising, it is enough to simply have a viable product, an accomplished leadership team or an elaborate vision for the future. There are many articles about how start-up companies “make no money” but still get loads of venture capital funding (i.e., Uber and Lyft), as if this is the secret to success as a start-up. Some people equate VC money with “revenue” itself – just stay attractive to VCs and keep getting more money to survive, without actual sales to customers. These presumptions are fallacies.

The reality is that it’s a tougher, uphill climb in fundraising when you can’t show market traction. The best way to showcase traction for your company is to show sales. You need to demonstrate that you are on a path to top-line revenue growth. As Mark Cuban on Shark Tank has said, “Sales cures all.” This may be hyperbole in a world where cure-alls are rare, but there’s still a nugget of truth in this statement.

Despite what you may have heard about one of the “chosen few” start-ups raising $50 million based on nothing more than scribbles on a napkin, no sales and a certain pedigree from Silicon Valley, the story of your start-up will be stronger when you can demonstrate early traction in the market. It could be a major end-user sale (with more in the pipeline), or the start of recurring revenue from a digital product, or at least channel partners buying your products to test in the market.

Build Credibility

Your start-up gains all-important credibility when there is proof that others believe enough in your idea to buy your product or service. It demonstrates that you are solving a problem in the marketplace, which in turn, means other customers will want your product or service, too. It’s no longer just you are insisting that you solve an issue that customers care about; a sale provides credibility to your claims.

Helps to Offset Your Spending

Another significant benefit of sales is that revenue, especially recurring revenue that comes into your company on a steady, predictable basis, offsets the cash that your start-up is burning every month. For example, if your company has a monthly burn rate of $100k with operational costs, recurring revenue of $10k would reduce your burn rate by 10 percent each month. It may not seem huge in the grand scheme of things, but when you are operating in the thick of your start-up to survive and thrive, you’ll find that every bit of revenue helps.

Recurring Revenue

Not just sales, but recurring revenue is key. It’s a type of business model that delivers a repeatable stream of revenue from the same customers who need your product or service and usually pay a monthly subscription or, depending on the product, have set up automated restocking on a monthly or quarterly basis.

For example, Spotify, Pandora, and Netflix are examples of digital-first companies that earn recurring revenue from customers’ monthly subscriptions. Another way to get recurring revenue is providing a consumable that is used in a system / machine; this is common in biotech and life science, or even with printers that need ink cartridges (consumables). Most companies want to incorporate some type of consumable or subscription-based service into their model. If you look at some tech hardware companies, you will notice that their support contracts form a large portion of their revenue, and this portion grows over time to become a significant source of revenue.

Top-line vs Bottom-line Revenue

Keep in mind that sales and revenue are top-line numbers, as opposed to bottom-line numbers, such as profitability. You can have high sales numbers, but be spending more on operations than the revenue you are bringing in. Typically, start-ups are not focused on profitability early on, especially if you measure profits after capital expenditures.

The good news is that, even if you are not profitable, you can do your initial public offering (IPO) based on top-line revenue and growth. VCs are, of course, hoping you will crack the code on bottom-line financials and stabilize your profit margins, but it’s not a deal breaker for an IPO. In fact, enough top line growth will shift thoughts of bottom-line growths onto the backburner.  So, while sales help “cure all things” in the short term and makes your life easier, the long-term goal is profitability.

A practical approach is to start with top-line growth, which establishes your company as a stable, promising, long-term player with a business model.  And then you can continue to improve the managing of your business to drive profitability (the difference between your revenue and your expenses) – the aim of business.