It’s not a secret that one of the most important metrics for investors is revenue. When it comes to a startup, it can be challenging to understand where to start in terms of finances.
- How to calculate the revenue if I don’t have a product yet?
- How to choose the revenue model?
- What is the best investment strategy for my startup?
Let’s dive deep and figure out the answers to these questions and more via these 4 clear steps.
1. Calculate the required resources/expenses
- Develop a product roadmap & calculate additional costs on tools that you might need to develop a product
- Calculate expenses on the team
- Plan marketing and User Acquisition expenses
- Other costs that are required
Make all the calculations from the perspective of MVP stage / 1 year / 3 years. This will give a clear picture of your spending for both yourself and investors.
Tips to decrease your startup expenses:
- Keep MVP scope small (focus on the core value, cut the rest)
- Check what startup programs different tools have. For ex., Twillio — one of the Paralect partners — provides up to $5,000 in credits for pre-Series A startups.
- Keep the team small (think twice before hiring someone) / hire part-time people
- Equity as an option to replace the salary (only for key people)
- Build partnerships (as an example — in marketing, you can find a partner and work with them based on a revenue-share model)
2. Choose the revenue model
- Research the competitors.
- Choose a model that works for your company and allows you to communicate your value.
- Brainstorm other sources of income.
- example: you’re building the platform for people to learn English. You can attract users to the platform + you can sell the software to English schools as an operational tool.
3. Build financial projections -> unit economics
- Define KPIs/metrics you’re targeting in regard to revenue.
- Example: 1000 leads per month -> 10% signed up users -> 4% paid users -> 2.5% retention.
- Build financial projections (MVP Stage, 1 year, 3 years)
- Calculate unit economics
There are different approaches for Unit economics calculations, but in the early stage, it’s important to understand the break-even.
- Review and adjust the model as needed
By making all the steps you can understand the revenue of your product and see where the break-even is. If you see that it’s too far away - play with the numbers, and pricing, and try different revenue models to improve it.
Tips:
- financial projections should be ambitious yet realistic — find the balance
- use benchmarks for defining the UA costs and funnel conversions.
4. Identify and mitigate the variables
- Understand the variables
- Figure out what affects your revenue
- Learn how to mitigate that
Once all 4 steps are done, it is going to be easier for you to understand your investment strategy as well. And as a cherry at the top — you’re now well prepared to pitch to investors.
Written by Lyubov Dementyuk
Managing Director at Paralect Venture Studio
Co-Founder at Mustard
Mentor at Founders Institute