4 steps to defining startup revenue
It’s not a secret that one of the most important metrics for investors is revenue. When it comes to a startup, it can be challenging to understand where to start in terms of finances.
Common questions include:
How to calculate the revenue if I don’t have a product yet?
How to choose the revenue model?
What is the best investment strategy for my startup?
Let’s dive deep and figure out the answers to these questions and more via these 4 clear steps.
1. Calculate the required resources/expenses
Develop a product roadmap & calculate additional costs on tools that you might need to develop a product
Calculate expenses on the team
Plan marketing and User Acquisition expenses
Other costs that are required
Make all the calculations from the perspective of MVP stage / 1 year / 3 years. This will give a clear picture of your spending for both yourself and investors.
Tips to decrease your startup expenses:
Keep MVP scope small (focus on the core value, cut the rest)
Check what startup programs different tools have. For ex., Twillio — one of the Paralect partners — provides up to $5,000 in credits for pre-Series A startups.
Keep the team small (think twice before hiring someone)/ hire part-time people
Equity as an option to replace the salary (only for key people)
Build partnerships (as an example — in marketing, you can find a partner and work with them based on a revenue-share model)
2. Choose the revenue model
Research the competitors.
Choose a model that works for your company and allows you to communicate your value.
Brainstorm other sources of income.
example: you’re building the platform for people to learn English. You can attract users to the platform + you can sell the software to English schools as an operational tool.
3. Build financial projections -> unit economics
Define KPIs/metrics you’re targeting in regard to revenue.
Example: 1000 leads per month -> 10% signed up users -> 4% paid users -> 2.5% retention.
Build financial projections (MVP Stage, 1 year, 3 years)
Calculate unit economics
There are different approaches for Unit economics calculations, but in the early stage, it’s important to understand the break-even.
Review and adjust the model as needed
By making all the steps you can understand the revenue of your product and see where the break-even is. If you see that it’s too far away - play with the numbers, and pricing, and try different revenue models to improve it.
Tips:
Financial projections should be ambitious yet realistic — find the balance.
Use benchmarks for defining the UA costs and funnel conversions.
4. Identify and mitigate the variables
Understand the variables
Figure out what affects your revenue
Learn how to mitigate that
Once all 4 steps are done, it is going to be easier for you to understand your investment strategy as well. And as a cherry at the top — you’re now well prepared to pitch to investors.
Written by Lyubov Dementyuk | Managing Director at Paralect Venture Studio
Co-Founder at Mustard | Mentor at Founders Institute