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August 26, 2008

Going Without Revenue

Starting a business with no plan for revenue is always a risky approach; it's especially so these days with no quick exits through either going public or being acquired and not much VC money available – especially for businesses with no revenue in the P&L.

Some people would argue that a "business without a revenue plan" is an oxymoron. That's NOT true; you can build spec houses for a business and know you won't get a cent back until you sell them; that's a business. In the Internet world you can build a service on spec hoping that it will be purchased and become a feature of another business (which probably does have revenue); nothing wrong with that except the risk. You can also speculate that, if you can only attract enough users, many revenue models will be possible; you may be right; Google was.

More on reasons why starting without revenue may be a good idea here. If you're convinced that's what you want to do, here's what you need to have any chance of success (and even with the items below, you will probably fail; but so will most new businesses WITH a revenue model):

Hugely deep pockets of your own. If you've got that, you've got lots of runway – but no verification that anyone besides you believes in your idea.

OR

Enough starting capital to survive at least twice as long as you think you're going to need to survive before you either sell out or raise more capital.

AND

A very low burn rate for personnel costs. If anyone you depend on (especially you) is taking out what they could earn in a "regular" job, you run a good chance of having to fold because they or you have to quit and earn a living.

AND

A business which can grow to scale without consuming large amounts of capital either for equipment or for hosting costs. This requirement can be met by offloading most of the cost of growth to your users' machines and Internet connections (as in a P2P service) or by frugal use of cheap hosting from the likes of Amazon.

AND

A source of follow on funding willing to raise the ante purely because you have met internal goals even if you haven't achieved the growth you hoped for and are still far from revenue. See Fred Wilson's post on why VCs DO like to do follow on funding; but remember that VCs also can and often will pull the plug (Fred again here).

The point is that many things will go wrong and, without revenue, you are walking a tightrope without a net. Revenue gets you both additional runway – infinite if you're breakeven and patient; revenue opens doors to new funding and/or acquisition from many more sources that will look at a non-revenue operation. That's why you need either a huge fortune of your own or an excellent combination of funding and low cost growth before swinging for the no-revenue fence.

 

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