Revenue Matters in the Midwest
My job at Next Level Ventures means I regularly meet with startup founders to discuss their business and my business, the business of investing money. Founders often express to me the frustrations they face when trying to raise a seed round in the Midwest. One of the more common frustrations is:
“Why are Midwest investors so focused on revenue?”.
It is a good question. I believe Midwest investors are (rightly) focused on revenue and I think I know why.
Revenue makes it easier to see future value. If your business has revenue that means you have customers. If you have customers you have attracted them and charged them and have the makings of a business model. If you have a business model, you can explain how you intend to grow your business in the future with metrics and assumptions based on the real constraints you faced winning your customers. While meaningful revenue might be years away and investors are all to aware that projections are wrong 100% of the time, describing your business using metrics, customer numbers and other assumptions gives investors an insight into how to value the future potential of your business today.
Revenue de-risks your business. It takes a huge team effort to build a revenue generating startup, trust me I know. You need to understand what customers want, then build it, price it, market it and deliver it. If you have revenue you have done all of these things and done them well enough to win some early customers and in the process, removed the first layers of risk from your business. Investors deal in risk everyday, and our job is to mitigate risks as we can and accept those risks we cannot. By generating revenue you are helping us mitigate the risk of your business never making money!
Fundraising is hard. Let me rephrase that. Fundraising is hard for startups on the East and West Coast, fundraising is really hard for startups in the Midwest. The fundraising environment for startups in the Midwest is very different to that of their East and West Coast peers. In the Midwest there are fewer seed investors who are on average more conservative, haven’t experienced a 10x return on a prior seed investment and as a result write smaller checks then their coastal counterparts. Midwest investors like to see revenue because it provides the founders with the option of reaching breakeven, instead of shutting down the company if they cannot raise a follow-on Series A round.
My advice to early stage founders is, prove that your product generates value and is demanded as soon as possible. Buffer’s story is a great example of selling an idea before writing a line of code. And if you need a little bit of funding to get there, Iowa has some of the best State-funded programs for early stage businesses in the country. The Iowa Economic Development Authority provides non-dilutive funding for businesses of all types and stages, whether you are finding product market fit or hiring your 100th employee — so please use it to generate revenue! Then come and see me.