In my observations, many startups inadvertently complicate their financial discussions with VCs by including random pilot revenues in their monthly earnings. This practice often obscures the future predictability of the business. VCs are primarily concerned with recurring revenue, a more reliable indicator of long-term stability and growth. Startups should consider focusing solely on this aspect and exclude pilot projects from their revenue calculations.
The problem with mixing revenue streams
Including pilot project income with recurring revenue can paint a misleading financial picture. Pilots are typically one-off engagements and don't guarantee ongoing commitment, making future revenue predictions challenging. For instance, a startup might show an inflated revenue figure one month due to a pilot but won't sustain this without recurring contracts.
Why recurring revenue matters
Recurring revenue, such as monthly subscriptions or annual contracts, provides a clear, consistent income stream that VCs favor. This predictability is crucial for valuations and assessing a startup's growth potential. For example, a cloud storage company's monthly subscription income is a more dependable metric than sporadic project-based earnings.
Advice for startups
- Financial reporting: Segregate and highlight recurring revenue streams in financial reports. Use this data to demonstrate growth trends and financial health.
- Case studies and examples: Share stories of customer retention and recurring revenue growth. For example, a startup that transitioned from project-based work to a subscription model can illustrate this shift and its impact on financial stability.
- Strategy for pilots: While pilots shouldn’t be the focus in VC discussions, have a plan to convert them into recurring contracts, showing potential for future revenue streams.
For startups seeking VC funding, clarity in financial discussions is key. Prioritizing and presenting recurring revenue can greatly simplify these conversations and align more closely with what VCs are looking for—a stable, predictable, and scalable business model.