Revenue is inbound money. This is the basic idea of revenue. Whenever you approach potential investors, revenue will form a big part of negotiations. Investors want to be sure that they are actually going to make a profit from their investments.
There are a number of different revenue types, though. And while all types of revenue are welcomed by investors, there are some types that are more powerful than others.
So what are the different revenue types that investors love the most?
The Predictable Guaranteed Revenue
Standing above all others is revenue that you can easily predict and is guaranteed. This is not a sales forecast this is money that's definitely on its way. Using these figures, investors can get a rough idea of how a business is doing and how much money they can expect to come in at the end of every month.
There are multiple types of service that will enable predictable and guaranteed income to flow in; purchase order financing and invoice factoring. The difference between purchase order financing and invoice factoring is that purchase order financing is designed to be for tangible items.
Both options are great for investors because it's well-known that both options help to facilitate growth. Remember that investors are not just looking at current performance they are looking at potential growth going forward.
Passive revenue is revenue that comes in without any effort on your part. The difference between this revenue and the predictable guaranteed revenue from above is that there's no way to guarantee how much you are going to receive every month.
This money tends to come from rental income, separate investments, and royalties if you happen to be in the entertainment industry. It tends not to be based on your normal business model.
It's money that's gained through no input on your part. Although investors acknowledged that this money isn't coming from your core business activities, it acts as a safety net. If your core operations suffer from a slow month, this extra income could very well keep you afloat.
Recurring Revenue from Core Business Activities
Far from predictable, this type of revenue is a representation of customers who have come back to make another purchase. The reason why investors love this type of revenue is because it indicates how well you are retaining your customers.
Your most loyal customers will make up the bulk of your revenue. It's common for your top 20% of customers to make up 80% of your revenue.
A low number of loyal brand followers think something is wrong because people are not coming back for more. Investors want to know whether a business is able to boost the individual worth of the average customer. A business where the average customer spends $100 over six months is better than a business where the average customer spends $10 and then never comes back.
However, keep in mind that investors are always thinking years ahead from now.
Sales Revenue from Core Business Activities
You may be wondering why this is so far down on the list. The truth is that investors like to have a degree of security. The three types of revenue above are relatively predictable and they are almost guaranteed to be there at the end of the month. Sales revenue from your core business activities fluctuates due to a variety of reasons.
For a start, you may be hit by seasonal fluctuations in your niche. Sales revenue is an indicator of success, but it can change at any time for any conceivable reason.
Companies seeking investment will usually use sales performance from the previous months and years in order to persuade investors that this is the right decision for them.
Profitability isn't as Important as You Think
A profitable company is always the aim. At the same time, it isn't the only thing that counts in this business. In many cases, investors consider this an extremely low priority. They realize that most startups are not going to break even for a number of years without significant external investment.
An unprofitable company can display the signs of success through a core group of customers that are purchasing products and services time and time again. Through the power of scaling, an unprofitable company can quickly become a profitable company, which is why it's seeking out the help of entrepreneurs in the first place. Roughly 75% of companies plan to up their departmental budgets this year, mainly because of external investment.
But it's largely up to investors as to how much risk they take. Every investment is a risk. What do you think is the most important type of revenue for a growing company?