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The Optimal Revenue Model For Driving Tech Ventures
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The quest to turn your idea into money, a career, or a successful exit can result in some important foundational tasks left unattended. It’s commendable to work hard and strategize correctly to bring your business into reality, but soon it comes time to introduce VC’s to the strategy. You may not get to where you want to go without them.
Take the point at which you’ve gone through a Series A round, you’re through beta, the bugs are out and you’re ready to mobilize, scale, market, distribute and otherwise disrupt the market. Although the product is ready to go, doing the marketing and penetrating your target market takes lots of more money, backing, support, and still more discipline.
In an effort to spare you the utter devastation of multiple VC funding denials, get ready before you go in front of them by having thought through your optimal revenue and compensation models. Why?
The revenue model is obviously important because it tells them how you’re going to get this thing off the ground and profitable, and the compensation model is necessary because it tells them that the strong management team on board is going to be motivated to see this thing through.
Necessary components in the revenue model
Let’s assume that the VC’s you get in front of are pre-disposed to what you’re doing (ie: the product is the right fit for their fund), so they’re already interested enough to assess it’s viability, the team, and overall prospects).
If you’re not monetized yet with a strong backbone to facilitate consistent, graduating revenue (with a wide traction base), consider backing up and re-working your previous funding options, such as angels and other primary investors. A monetized idea goes a long way with VC’s.
Absent this, your revenue model should:
Forget pie-in-the-sky numbers and instead show sustained, justifiable revenue increases year-over-year facilitated by a pre-requisite sustained effort to grow your traction base (increased, sustained traction resulting in an increasing revenue base).
Remember that the numbers, the strategy and the execution will all be a reflection of the ability of the management team to bring the venture to financial fruition. A great management team combined with a revenue plan containing leaks and irrationalities will possibly capsize a VC funding. Sure, the VC’s want to see 30% revenue increase year-over-year, but only if it’s feasible. The VC’s need to see a high probability of success in the revenue model; the only real variable in the equation should be the management team’s ability to execute consistently and successfully, and the experience of the team will cover off this concern in the minds of the VC’s.
Be consistent and confident
The VC may, if he/she hasn’t heard of your venture, say no on principal and see if you’re serious enough to work for the funds’ money.
If you’ve been able to get an introduction to the VC from someone in your network who has pre-emptively lobbied your venture, you may not have to worry about this. However, sometimes your first intro is a cold one – the only prior knowledge he/she has about you is your business plan and what other people are saying.
You’ve heard and read everywhere that the 30-90 second elevator pitch needs to be refined; what’s worth repeating here is to not verbalize the mechanics of the venture during the pitch, but rather a quick, 3-strike penetrating message:
This is the problem – 10 seconds
Here’s our solution – 10 seconds
What the solution provides – 10 seconds
The venture’s activity over the next 6 months – 10 seconds.
Put a solid, confident pitch out there. Don’t say too much because the more you talk, the greater the tendency to get into the mechanics of the venture, which the VC will get to in due course, but not now. They’re smart and don’t need you to explain everything. The key is to sell yourself – as confident and able to disrupt the market you want to penetrate.
Also make sure that the activity for the next 6 months is reasonable for where the venture is at the moment. If you get it right, it shows reasonability, a well thought-out plan, and adds to the confidence picture you want to portray.
Local, national, international
These parameters get blurred with the globe one URL away, but the message is to penetrate a manageable space, secure that space, and then scale. Relaying this to the VC will again show a reasonable plan for penetration and growth. So you emphasize, for example, hitting the west coast market, then once your metrics show viability and sustainability, you venture our nationally, etc…
Showing the VC a structured and manageable plan lowers the probability of failure and attests to the ability of the management team to do things right.
These are just a few highlights of what I think you should have ready when you go before a VC to get funded at this level. Above all, your ability to show confidence and exude ability and trust will go a long way to get their money and business support, which may be the key to your own success.
These traits are what we’ve noticed as we work with business owners to maximize their business profitability. If you operate a business, we welcome your insights at www.burgesskilpatrick.com or on any of our social sites:
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and let us know what you think.
Nicholas Kilpatrick is a partner at the accounting firm of Burgess Kilpatrick in Vancouver, B.C. He specializes in business development, and has worked with business owners to increase profitability at all stages of their businesses. He can be reached at firstname.lastname@example.org or at 604-327-9234.