Questions

I'm working on a startup. The idea is well received. We need to raise money to get a functioning product. Advice on how to go about it is split in 2 camps. Camp 1 says: "Make a revenue model and show an investor how he/she can value the company and decide what their investment is worth in terms of percentage of the venture" Camp 2 says: "Don't bother about revenue, you'll make a barrier to users, users before revenue... get it out for free and blow up the industry" My question is: We still need money for development, how do I decide that $X is worth %Y for the camp 2 approach.

There's no set-in-stone formula. The answer depends on the degree to which implementing a revenue model would potentially cause a mass user exodus.

A) If implementing a revenue model would obviously cause no problems, then investors might be ok with Camp 2.

B) If a reasomable person might think that implementing a revenue model could cause a mass exodus of users from your service, then investors would not be ok with Camp 2.

Having said that, each investor is different, and there has been a steady decrease in the popularity of investing in Camp 2 startups. The popularity of Camp 2 startups fluctuates with the current strength of the economy (weaker economy = less investors willing to go with Camp 2).

I usually recommend a hybrid approach, which involves initially implementing a revenue model on at least a small scale to start testing the waters. You want to deploy this as quickly and cheaply as possible, and then scale it up, just like an MVP. You start off by exposing a potentially unrefined revenue model to just a small % (e.g. 1%) of your users to test the waters, and then slowly scale up its deployment as you improve it (based on data feedback from that first pool of users). Even if you only have time to test the 1% implementation before approaching investors, it will be better than nothing. You can use the data from that experiment to show investors that (hopefully) it didn't cause a mass exodus of that 1% of users, and you can use it to have a ballpark estimate of the revenue you could get if it was fully deployed and better implemented.

For certain unique situations, it may be important to remember that for this initial testing, the deployment of your revenue model doesn't actually have to generate revenue for yourself, it just has to have the appearance to those 1% (or whatever %) of users as your revenue model would. The most important part of this initial testing is just testing whether your revenue model will interfere with your user base. For instance, you can start by creating fake ads that don't actually generate any revenue. That may sound weird, but it was relevant to a unique situation I helped someone else with. It allowed them to save time and money to deploy their initial test. Once you have data showing that it doesn't scare users away, then you can make convincing estimates of future revenue based on your growing user base.

If you'd like more tailored advice to your specific situation let me know,

best,

Lee


Answered 3 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2019 Startups.com LLC. All rights reserved.