“Lifestyle that we never knew. Go at a reverend for the revenue.”
– Kendrick Lamar a.k.a. Business, “Money Trees“
How do you determine how much your product or service will make? The two common revenue models are:
- Top-down: percentage of the Total Available Market (TAM)
- Bottoms-up: price x # customers x growth rate
Building a revenue model is easy; passing the smell test is difficult. I have seen many models that demonstrate growth to $500M in revenue over five years, and it is just not credible. An ideal venture-backed model should be:
In today’s world of consumer internet and enterprise IT, this model should lose no more than $10-$15M over the four-year period. Every market varies, and many, such as SaaS, are measured by monthly recurring revenue (MRR) and not by GAAP recognized revenues.
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your article on AOL? I need a specialist in this area to unravel my problem.
May be that’s you! Looking forward to look you.
What are your thoughts about market place models like Uber & Square types of revenue models in the pitch format?
Payments, for one, would grow faster than traditional models in the form of Top Line revenue, moneys collected vs moneys kept.
How do you balance the focus of the two in the pitch?
I recall a pitch where one of the partners commented “I feel like a dog watching TV” when we landed on the revenue slide.
As you said in ‘Building Revenue Model’, Top Down approach will be definite route to disaster. It is always better to build the business on botoom-up approach and with conservative estimates.
This was an interesting read. Will make some “adjustments” on our YCombinator financial “guess sheet.”
I love it! It’s so hard to find targets especially as an early stage company that feel aggressive, reasonable and let you know that you are on a good trajectory!