Getting Your Revenue Model Right

Getting Your Revenue Model Right

I got my start in this crazy industry in the late 90s. Straight out of college, I found myself with a CEO title, funding, a team, and a business plan that needed to be written.

Back then business plans were huge multi-page documents full of Excel spreadsheets. Today’s slick ten-slide presentations wouldn’t cut it. Writing a business plan felt more like writing a PhD thesis than a pitch deck.

Regardless of the decade in which it was written or the number of trees used to print it, a good business plan (or pitch deck) answers a range of questions about the business you want to build: 

  • What are you selling?
  • Is there a market? How big is that market? Will that market increase in size?
  • Who are your customers? What are their needs?
  • Do you have competitors? Who are they?
  • Who is your team?
  • What milestones have you set for the company?
  • How will you market your business?
  • And finally, what does your financial model look like?

It was this last question that kept me awake. I remember sitting at my desk late one night back in 2000 speculating how fast I could grow and trying to predict how much revenue I could expect in years 2, 3, 4, 5, and so on. Unfortunately the internet of those days yielded little help, so I had to go the old-school route and seek out the experts.

I soon found myself in Bernie Nisker’s kitchen posing this question. After establishing my ignorance, he patiently explained to me — over a series of many visits — how balance sheets, income statements and cash flow worked. It was in Bernie’s kitchen I learned to appreciate the beauty of financial statements and models. I still remember this great pieces of advice:

Your financial model needs to be airtight

The construction of a financial model is a thought exercise. How well you’ve put it together demonstrates to investors whether you have what it takes to build a successful business. It signals to them how well you understand business, and especially your business.

If you present your financials to me, I expect them to be top notch. Your model must include cash flow, balance sheet, and income statement, because they all matter. I want to see each key assumption called out, and I want to see that you are prepared to explain any of them on the fly. I recently met with an entrepreneur asking for seed investment who predicted a monthly churn rate of 8%. I asked him why it was so high. His answer, “I don’t know. I didn’t research churn.” Bad answer.

Your model has to be flexible enough that, without missing a beat, you can seamlessly answer what happens to revenue in a year if your CAC (Customer Acquisition Cost) increases by 20% over your projection. This might sound like an old-fashioned approach in our current “break shit” era, which is known for rejecting established business models, but it works for a reason. It saves you from wasting time and treasure on a project that doesn’t stand a significant chance of success. (Also, if I’m really being honest with myself, I’m getting old and this is a way to honour guys like Bernie who taught me.)

It’s never a bad idea to seek out the advice of experienced entrepreneurs, especially when it comes to modelling your business. They won’t do the work for you, but a few choice words of wisdom can save you a whole lot of time, money, and grief.

Joshua Bixby

Like most tech troublemakers, I’m a problem-solver who likes to explore new ideas and play devil’s advocate (not necessarily in that order).

No Comments

Comments Closed