Are we in a new .com bubble? It seems quite likely, but that doesn’t
mean that many of today’s startups aren’t better at generating actual
revenue than their now-defunct counterparts of the late 1990s.
According to venture capitalist, Josh Kopelman, whose First Round
Capital operates seed stage funds, about 60% of the companies in his
firm’s portfolio have generated over $250,000 in revenue in the 18
months following their financing. The percentage in 2005: just 21%.
Kopelman didn’t quite expect this. He explains:
I was not expecting such a dramatic increase — especially because while our fund size and investment team has increased over the years, our investment strategy has not. Our average initial investment remains under $500,000. We continue to invest in a company’s first round of funding. We still are focusing on capital-efficient internet startups.
So what’s going on? Kopelman suggests that his penchant for ecommerce companies has helped, as “ecommerce companies typically have a shorter path to revenue.” He also points to the larger number of monetization platforms today, many of which are quite mature, as well as the decreased costs of launching a technology company. The former, of course, makes it easier to implement revenue-generating business models and the latter reduces time-to-market, an important thing when revenue is being measured in an 18 month period.
Of course, it’s worth pointing out that Kopelman’s informal look at one of his funds may not be representative of all startups, but his observation is interesting nonetheless. What would be even more interesting is to see a breakdown of revenue across various sectors.
The good news is that, if many startups are generating greater amounts of revenue earlier, some of them might be able to find ways to survive when the current bubble, whatever its actual size, bursts. The bad news is that revenue isn’t the most important metric. Cash flow and profit are, of course, far more important. A company can’t keep the lights on without the former, and it can’t sustain itself and grow without the latter.
Groupon provides perhaps perfect example of this. Although the company grew to more than a billions of dollar of revenue quicker than just about any company in history, many have questioned its future prospects because of otherwise questionable financials.
That’s something today’s revenue-generating startups should keep in mind. Revenue is one stop on the path to the promised land, but it’s not a one-way ticket.