What's Better? Early Revenues Or Rapid Growth? - Part One

There are two growth pathways a startup can take. The first one is the revenues-first pathway, which means sacrificing rapid growth for the benefit of generating revenues as soon as possible. The second one is the assets-first pathway, which means sacrificing early revenues for the sake of rapidly accumulating assets (like a huge user base), and only after getting to a certain magnitude converting them into a revenue stream. 

Both pathways are equally interesting and have the potential of creating a huge and successful company, but yet they represent two different approaches.

On this post I'll focus on the revenues-first pathway. On the next post, I'll cover the assets-first pathway and which path to choose when both pathways are suitable (you can sign-up for the Founders' Guidebook Newsletter to get the next post directly to your inbox).  So let's start...

The revenues-first pathway is quite straight-forward and has three goals:

  1. Have as many paying customers as possible
  2. Maximize the average income per customer (a.k.a. customer lifetime value)
  3. Minimize the cost of acquiring a new customer (a.k.a. customer acquisition cost)

To be profitable, you need to make sure that the customer lifetime value is higher than the customer acquisition cost. Preferably, the customer lifetime value should be at least twice the customer acquisition cost.  Once this goal is achieved, it’s mostly a matter of increasing the number of paying customers, while keeping the customer acquisition cost low (the customer acquisition cost has a tendency to increase when shifting from the early adapters to the mass market, but more on that on a different post).

The revenues-first pathway especially suits companies that sale tangible products, since there's no sense in subsidizing these products for your customers. It also suits companies with services where most of the added value is reached without the need to collaborate with others. Dropbox would be a good example for such a service, since one gets most of the added value by synchronizing his file between his own computers and mobile devices. 

The biggest advantage of the revenues-first pathway is that many times you have the option to choose between bootstrapping and raising capital. If you’re willing to settle for a life-style business or relatively slow growth rates, then you should seriously consider the bootstrapping option. However, if you want to achieve a higher growth rate or must do so in order to deal with competition, then you’d probably be better with raising capital.

The main disadvantage of this pathway is that asking your customer to pay, usually significantly decreases both the conversion and the growth rates. And if you don't have a perfect product-market fit, then you're chances of growing while asking for money are quite low. 

As mentioned above, I'll cover the assets-first pathway on my next post. 


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