Every startup pitch has a slide that shows a future revenue or sales forecast. Can you guess what the overall shape of that revenue growth looks like? If you thought “hockey stick,” then ding, ding, ding – you are right! For those that don’t know what a hockey stick sales growth chart looks like, check out the figure below. But, is that shape of the sales growth curve realistic for startups? It could be.
Startup Sales Growth. Graphic Source: https://medium.com/@sourabhmittal_99269/this-is-what-hockey-stick-growth-looks-like-cf71c76c2f92
We recently attended the annual update for the portfolio companies for VisionTech Angels. Over the course of the presentations, “sales up and to the right” became kind of a little joke because startup after startup after startup showed how their sales actually had trended up and to the right (and if not sales, other metrics of customer engagement).
But we would argue that this pattern makes sense given where this angel group is in its own evolution. VisionTech Angels was started in 2008 to connect Indiana-based startups with angel investors. So it’s been investing in startups for just over 10 years. Recent analysis by TechCrunch suggests that the average venture capital funded exit happens after 7 to 8 years. Most angels get involved 2 to 3 years before venture capital funding. So VisionTech’s portfolio companies should have gone in one of four directions:
Failure - No annual update.
Exit – Usually a yay!
Zombie - Sales have stalled and they are generating enough cash to survive but not be interesting to an acquiror.
Sales growth that’s Up and to the Right – Another yay!
And, VisionTech’s portfolio did mostly that in 2019. There were 3 exits. There are several companies in acquisition discussions. A couple of startups have more modest growth because they focused on getting cash flow positive, meaning they are spending less each month than they are generating in revenue. Being cash flow positive is a strategic decision for a startup. It most likely means slower growth (because growing sales requires spending money) to focus on getting the right balance of activities and a scalable sales process. Once product-market fit is firmly established and the startup knows how to create a repeatable sales process, then investor dollars act like fuel on a fire – sales growth can really take off. At the same time, several startups are still finalizing their product offerings, especially in life sciences because it takes so much longer, and moving toward product-market fit.
The best part of the meeting, however, came after the update. Investors met one-on-one with the startup CEOs to explore what they need to help their startup grow. This was a great example of avoiding one of the debtbergs we talk about in the Human Ocean - Investor Sea – Elusive Expectations of Behavior. Smart startups know that not all money is created equal. You should be looking for investors, especially at the angel stage, who can help you grow via their knowledge, networks, or even follow-on funding.
Overall, the update was inspiring about the state of startups in an Indiana angel network. Sales ARE mostly up and to the right. Let’s hope 2020 continues on the same path.