At today’s MIT Enterprise Forum Atlanta Entrepreneurs Uncensored Sanjay and I were asked if there were things that kept us up at night. Being the first to respond, I quickly said that I sleep great at night (unrelated to my Tempur-Pedic bed but that’s nice as well) for one simple reason: recurring revenue.
Recurring revenue with high gross margins is the holy grail of business models.
Here are some reasons recurring revenue is so powerful for startups:
- Recurring revenue makes cash flow forecasting very easy (running out of cash is the #1 reason startups fail)
- Recurring revenue makes predicting hiring needs straightforward so that you can recruit well in advance
- Recurring revenue is often indicative of a business model that has strong economies of scale
- Recurring revenue makes banks more comfortable with providing debt to finance growth (most businesses won’t qualify for debut unless the entrepreneurs have significant personal assets and are willing to do personal guarantees)
Recurring revenue businesses are more difficult to get off the ground but once they’re going they’re easier to manage. Recurring revenue helps entrepreneurs sleep better at night.
What else? What are some other reasons recurring revenue is so powerful for startups?
4 thoughts on “The Power of Recurring Revenue in Startups”
Don’t you know it! The one thing that kept ME up at night while running VBxtras/Xtras from 1994-2006 was our LACK of recurring revenue. Never again will I build a company of that size that must live and die by its daily sales…
Most entrepreneurs forget the simple fact that when your relying on day-to-day sales, your basically waking up everyday unemployed until you make a sale.
Another great result from a recurring revenue model is the shift of focus from sales to customer success. While sales and growth are always important, the customer base ensures the lights will stay on and the paychecks get cashed. On-boarding becomes a mutually beneficial investment.
As a founder of a new startup myself, this is something I need to focus on.
The problem is that in my line of work, its very easy to get sucked into one time gigs. These are nice for the sudden influx of cash, but they are not sustainable.
Thanks for the reminder that we all need to look at the long term a lot more!