3 ways to generate more revenue to delay alternative funding
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Current unstable market conditions are once again driving home the old adage that cash is king. Market volatility is on the rise, and many startups are looking to increase their cash inflows in order to create a strong foundation to weather whatever economic storm may be brewing ahead.
Cash provides a safety net, a longer runway, and flexibility for startups to capitalize on opportunities during a downturn, such as by diversifying offerings, making product improvements, or making key strategic hires when needed.
But how can you actually increase and/or optimize your revenue sources? Most SMBs don’t have the opportunity to engage in debt financing with legacy financial institutions like Goldman Sachs. And while I respect out of the box ideas, such as when Airbnb made $30k by creating "Obama O's" and "Captain McCain's" cereal to sell during the 2008 Democratic and Republican national conventions, it hardly seems like a consistently reliable way to raise extra cash.
My last article explained how a laser focus on ROI and savings, through steps like engaging in a cost audit and renegotiating with vendors, can help you save. In this article, I’ll shift my focus to the other side of the same coin: how you can raise more money. By cutting costs and raising extra cash, you’ll be in a strong position to outlast the current bear market.
How to generate more revenue
Imagine that you have six months of runway left in the bank. You cannot raise another round and you're miles away from breaking even on product. You need a very quick way to generate cash or you're going to die as a business. Here are three methods that I recommend for small to large SMBs who need to raise cash fast:
#1. Upsell existing enterprise customers: If your business is doing over a million a year and you already have some enterprise customers, a very obvious way to immediately increase cash flow is to up-sell on enterprise features that you can ship quickly. You likely have a backlog of requests and with six months of runway in the bank, moving up market can provide some much needed cash flow breathing room.
For example, Veeva Systems, a vertical life sciences CRM built on top of Salesforce, did just that. They raised $4 million before they built anything by pre-selling to big pharmaceutical companies. They got them to pay close to $20 million on contracts by just selling the idea. Customers would ask, ‘do you have a product demo?’ and they’d respond, ‘no, we haven’t built it yet.’ With enough conviction anything is possible!
I did this with Buyer. One of our customers was going through a merger so we built them a procurement system (which was normally outside of the scope of the business). This really helped us since a) we got paid a significant amount for it and b) it really helped us understand what the needs of an enterprise procurement organization were like from a systems level. That would have really helped us with product development down the road.
#2. Start consulting: It depends on the business, but generally speaking, if you have the expertise and willingness to carve out the resources for time, consulting is a great way to generate margins of 30% to 40%. For example, the market is starved for design resources right now. Let's say you have a killer UI designer. There’s an opportunity for you to carve out a design consultancy and, depending on the product, you could likely sign a $300,000 annual contract. There’s also the avenue for whitelabelling or reselling services through agencies. You could go to an agency who is searching for resources or you could go to an actual business. However, this will likely be a lower margin.
Note that while consulting is a distraction from the core product, it’s a great way to generate short-term cash through the lens that you will go back to focusing on the core product later. VCs discourage this, but if you have six months of runway in the bank and are deciding between death or consulting, I would advise going the consulting route. I will go into more detail with this below.
#3. Sell data: If you are generating a unique data set you likely have data you can sell, there are data marketplaces that will match you to a buyer of your data. If it’s enough to significantly extend your runway, then that’s pretty compelling, especially because it’s no marginal cost.
While there are many options around “how” to generate cash flow to keep your business afloat, what's more important is a framework to help you make this decision. It breaks down to a runway calculation and you have to evaluate the following:
- Is your product generating revenue?
- More importantly, do you have a repeatable sales motion?
- If yes, how many more sales do you need to get to break even?
- If no, then your decision is fairly obvious: "I need external revenue sources. What can I do?”
How to decide which method is best for your business
Considerations to keep in mind when deciding on which method to select include:
Short term cash vs product development
You can either break even on product and control your own destiny or you can show enough growth in some form that you can raise another round. How do you decide which is right for you?
The trade-off between product development and ROI of short-term cash can be a life or death decision for startups.
Let’s assume you have three engineers and you are building a software tool that automates procurement. A giant firm says, "We want you to build us a procurement system from scratch. We'll pay you $300,000." That's nine months of runway right there. But you have to allocate one of your engineers to build the product. It’s a tough decision because there are real risks. You have to weigh the trade off between building for specific use cases versus furthering product development.
A lot of these decisions should be backed out to how long you can actually go for. What is the length of time that you need to survive? How much runway do you actually need? Then, what is the band of revenue that you think you can generate within that time?
It also depends on scale. For example, let’s say you land a million dollar consulting contract. Does that make a discernible difference? If you're a $10 million a year business, does generating 10% more revenue matter?
Funding methods to avoid
Aggressive fundraising methods, such as bridge loans and venture debt, should be treated with caution, especially with rising interest rates. The primary preferred method should be generating cash from customers.
If you've raised money, your investors have the expectation that you're going to execute on this vision, unless you communicate that with them. What you shouldn’t do is deprecate that vision to try and make short-term revenue. Fast results should never be pursued at the detriment of your customers. In the essay 1,000 True Fans, Kevin Kelly writes, "It's better to have 100 people love you than a million people sort of like you." If you have 100 people that love you, there is a path out of this. Do what it takes to survive, but don't sacrifice that.
What you should avoid: partnerships for fast cash flow
I've never seen a fast, effective partnership—great ones often take awhile to nurture. This is time that you don’t have if your startup is on the verge of collapse. I advise focusing on what you can control immediately. For example , you could sell and do a revenue share on something that you think will be additive to your customer base, in order to generate revenue from a partnership, such as an outsourced accounting firm. They can sell Ramp as a benefit to their customers, the rationale being that Amex is subpar and their customers deserve a better card solution. Ramp will then pay them some bonus on every successful referral.
I think partnerships that sell your product are far more difficult. If you have a very tight timeframe, focus on what you can control, triple down on that, and generate short term results because focus really matters. If you're going to try and do one thing, do it well. Resuscitate your company and then you’ll have the ability to shift your focus back to product development.
Instability can translate into opportunity
I have launched four different startups across seven and a half years. The most successful by far was the one I began during the pandemic (Buyer). The tipping point around this instability was that customers, who could not afford or had not hired a great procurement team, needed what they provided. Cost controls and guidance around purchasing is what Buyer capitalized on. We offered the power of an enterprise procurement team to small to mid-market customers for a fraction of the price at a time where companies were most cost conscious.
If you think outside the box, there is always a path forward. The question is really, how much do you believe in it? How gritty are you? It’s still important to maintain a level of intellectual honesty to allow you to understand if something just isn’t working. There's a very fine line between, "I know this isn't working and I'm deluding myself into thinking this is working," versus, "I know this can work. I have so much conviction that it can work." If you have the conviction, the sky’s the limit, no matter the market conditions.