The world of startups is a bit like a gold rush right now: there’s lots of money to be made, almost no rules regarding who will make or lose it, and only a few will actually see a sustained profit at the end of the day. Global venture funding hit a record high in the first half of 2021, with $288 billion being poured into early-stage businesses. Numbers that high are probably leaving entrepreneurs everywhere wondering what they need to do to get a bigger slice of that pie.
Small business leaders salivating at the idea of getting a big cash injection from an angel investor need to slow things down a bit and focus on their own company first. The answer to the age-old question of whether your business should be trying to make money or raise money is almost universally the latter. Generating solid revenue streams early on will make many of the fundraising problems much easier to handle later on.
4 Reasons to Focus on Revenue Before Fundraising
1. More Independence
It doesn’t matter how good your idea is, how scalable it can be, or how interested investors are: a startup already making money is in a completely different league from one with no revenue. That’s not to say that there’s anything wrong with startups that can’t initially generate cash.
Some ideas require larger amounts of capital than others to become viable — but the early establishment of revenue streams completely changes the relationship between your business and its investors.
If you’re already making money, you’ve already proven that you have an established model to maintain a successful business.
Any investors who hop on board later will need to acknowledge that they’re joining an already-successful enterprise, not trying to build one from the ground up. On the other hand, if your company has yet to make any money at all, your investors will want a bigger say in how you eventually go about doing so.
Every dollar you make before allowing investors to come in is a piece of evidence showing that your business works and doesn’t need an investor to come to save it. This can help protect you against any overbearing “angels” later on down the road.
2. More Leverage
Along those same lines, revenue also makes investor negotiations much easier to navigate. If you’re running a business without products currently deployed, it can be difficult to negotiate with investors in good faith. How can either of you confidently give a valuation of a business that doesn’t make money? How will you be able to push back against offers that seem too low, too controlling, or not cash-heavy enough?
The truth is that revenue is your ace in the hole when it comes to negotiation.
Not only does it increase your standing among investors, but it also ensures that your business doesn’t become fixated on ideas that only become profitable at a massive scale, ceding even more control to your investors.
According to Devon Fanfair, co-founder of startup studio Devland, “building companies that demonstrate enterprise value is the best path for new builders because they generate revenue with very little investment.
It allows operators to focus on solving quantifiable problems and building momentum that is fed with every new iteration. Unfortunately, some startup builders get lost solving consumer pains that are harder to validate without scale. This can prove to be adversarial to growing confidence and routine behaviors that breed traction.”
If it’s solid and consistent, even modest revenue can make a world of difference during seed rounds.
3. More Choice
The logic here is pretty simple: there is a relatively small subset of investors interested in investing in startups founded on great ideas that have yet to deploy them at a profit, but nearly all investors working today are willing to invest in companies that have an already-proven ability to make money out in the wild. So the more spoiled for choice you are when it comes to interested investors, the better terms you’ll be able to secure when negotiations eventually rear their ugly head.
If you don’t believe me, listen to Geoff Ralston, President of legendary startup incubator Y Combinator: “Investors need persuading. Usually, a product they can see, use, or touch will not be enough. They will want to know that there is a product-market fit and that the product is experiencing actual growth.
Therefore, founders should raise money when they have figured out what the market opportunity is and who the customer is, and when they have delivered a product that matches their needs and is being adopted at an interestingly rapid rate.”
A revenue stream of practically any size at all proves all of the things listed above — and more.
4. Greater Chance of Long-Term Success
It’s no secret that the vast majority of startups fail within the first 5 years after their founding, whether they received funding or not. While this issue is often thought of as germane only to the world of startups, businesses of all kinds are in constant peril of failure if they can’t find a way to make money.
Investor funding can only prop up an unprofitable business for so long, but it can disguise some of the internal problems young startups often suffer from. Eschewing early investment in favor of revenue generation ensures that your company never has the chance to mask unsustainable losses with investor money.
Secure revenue streams also mean that your business always has something to fall back on.
If plans for expansion and new products go completely awry, you can always be sure that there is at least one pathway for your business to remain viable into the future.
The world is so saturated with seed money right now that it’s easy to lose sight of what running a business is all about. Focus too much on investors, and they’ll never return the favor. Instead — prove that you have a business plan capable of surviving and thriving, and you’ll have no difficulty attracting the interest you want.
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Fintech Kennek raises $12.5M seed round to digitize lending
London-based fintech startup Kennek has raised $12.5 million in seed funding to expand its lending operating system.
According to an Oct. 10 tech.eu report, the round was led by HV Capital and included participation from Dutch Founders Fund, AlbionVC, FFVC, Plug & Play Ventures, and Syndicate One. Kennek offers software-as-a-service tools to help non-bank lenders streamline their operations using open banking, open finance, and payments.
The platform aims to automate time-consuming manual tasks and consolidate fragmented data to simplify lending. Xavier De Pauw, founder of Kennek said:
“Until kennek, lenders had to devote countless hours to menial operational tasks and deal with jumbled and hard-coded data – which makes every other part of lending a headache. As former lenders ourselves, we lived and breathed these frustrations, and built kennek to make them a thing of the past.”
The company said the latest funding round was oversubscribed and closed quickly despite the challenging fundraising environment. The new capital will be used to expand Kennek’s engineering team and strengthen its market position in the UK while exploring expansion into other European markets. Barbod Namini, Partner at lead investor HV Capital, commented on the investment:
“Kennek has developed an ambitious and genuinely unique proposition which we think can be the foundation of the entire alternative lending space. […] It is a complicated market and a solution that brings together all information and stakeholders onto a single platform is highly compelling for both lenders & the ecosystem as a whole.”
The fintech lending space has grown rapidly in recent years, but many lenders still rely on legacy systems and manual processes that limit efficiency and scalability. Kennek aims to leverage open banking and data integration to provide lenders with a more streamlined, automated lending experience.
The seed funding will allow the London-based startup to continue developing its platform and expanding its team to meet demand from non-bank lenders looking to digitize operations. Kennek’s focus on the UK and Europe also comes amid rising adoption of open banking and open finance in the regions.
Featured Image Credit: Photo from Kennek.io; Thank you!
Fortune 500’s race for generative AI breakthroughs
As excitement around generative AI grows, Fortune 500 companies, including Goldman Sachs, are carefully examining the possible applications of this technology. A recent survey of U.S. executives indicated that 60% believe generative AI will substantially impact their businesses in the long term. However, they anticipate a one to two-year timeframe before implementing their initial solutions. This optimism stems from the potential of generative AI to revolutionize various aspects of businesses, from enhancing customer experiences to optimizing internal processes. In the short term, companies will likely focus on pilot projects and experimentation, gradually integrating generative AI into their operations as they witness its positive influence on efficiency and profitability.
Goldman Sachs’ Cautious Approach to Implementing Generative AI
In a recent interview, Goldman Sachs CIO Marco Argenti revealed that the firm has not yet implemented any generative AI use cases. Instead, the company focuses on experimentation and setting high standards before adopting the technology. Argenti recognized the desire for outcomes in areas like developer and operational efficiency but emphasized ensuring precision before putting experimental AI use cases into production.
According to Argenti, striking the right balance between driving innovation and maintaining accuracy is crucial for successfully integrating generative AI within the firm. Goldman Sachs intends to continue exploring this emerging technology’s potential benefits and applications while diligently assessing risks to ensure it meets the company’s stringent quality standards.
One possible application for Goldman Sachs is in software development, where the company has observed a 20-40% productivity increase during its trials. The goal is for 1,000 developers to utilize generative AI tools by year’s end. However, Argenti emphasized that a well-defined expectation of return on investment is necessary before fully integrating generative AI into production.
To achieve this, the company plans to implement a systematic and strategic approach to adopting generative AI, ensuring that it complements and enhances the skills of its developers. Additionally, Goldman Sachs intends to evaluate the long-term impact of generative AI on their software development processes and the overall quality of the applications being developed.
Goldman Sachs’ approach to AI implementation goes beyond merely executing models. The firm has created a platform encompassing technical, legal, and compliance assessments to filter out improper content and keep track of all interactions. This comprehensive system ensures seamless integration of artificial intelligence in operations while adhering to regulatory standards and maintaining client confidentiality. Moreover, the platform continuously improves and adapts its algorithms, allowing Goldman Sachs to stay at the forefront of technology and offer its clients the most efficient and secure services.
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UK seizes web3 opportunity simplifying crypto regulations
As Web3 companies increasingly consider leaving the United States due to regulatory ambiguity, the United Kingdom must simplify its cryptocurrency regulations to attract these businesses. The conservative think tank Policy Exchange recently released a report detailing ten suggestions for improving Web3 regulation in the country. Among the recommendations are reducing liability for token holders in decentralized autonomous organizations (DAOs) and encouraging the Financial Conduct Authority (FCA) to adopt alternative Know Your Customer (KYC) methodologies, such as digital identities and blockchain analytics tools. These suggestions aim to position the UK as a hub for Web3 innovation and attract blockchain-based businesses looking for a more conducive regulatory environment.
Streamlining Cryptocurrency Regulations for Innovation
To make it easier for emerging Web3 companies to navigate existing legal frameworks and contribute to the UK’s digital economy growth, the government must streamline cryptocurrency regulations and adopt forward-looking approaches. By making the regulatory landscape clear and straightforward, the UK can create an environment that fosters innovation, growth, and competitiveness in the global fintech industry.
The Policy Exchange report also recommends not weakening self-hosted wallets or treating proof-of-stake (PoS) services as financial services. This approach aims to protect the fundamental principles of decentralization and user autonomy while strongly emphasizing security and regulatory compliance. By doing so, the UK can nurture an environment that encourages innovation and the continued growth of blockchain technology.
Despite recent strict measures by UK authorities, such as His Majesty’s Treasury and the FCA, toward the digital assets sector, the proposed changes in the Policy Exchange report strive to make the UK a more attractive location for Web3 enterprises. By adopting these suggestions, the UK can demonstrate its commitment to fostering innovation in the rapidly evolving blockchain and cryptocurrency industries while ensuring a robust and transparent regulatory environment.
The ongoing uncertainty surrounding cryptocurrency regulations in various countries has prompted Web3 companies to explore alternative jurisdictions with more precise legal frameworks. As the United States grapples with regulatory ambiguity, the United Kingdom can position itself as a hub for Web3 innovation by simplifying and streamlining its cryptocurrency regulations.
Featured Image Credit: Photo by Jonathan Borba; Pexels; Thank you!