When it comes to catching an investor’s eye for your startup, it’s not just about having a brilliant idea, it’s about demonstrating you can make money. To do that you need to confidently manage and present multiple income streams to a potential investor. Showing you have different revenue streams can boost your financial forecast, making your business look extra appealing to investors. Here, we take a deep dive into the world of revenue models; active, passive, software, and services, and break down what investors are really looking for.
Active vs. Passive Revenue: What’s the Difference?
Active revenue comes from directly working with your clients or customers. This could be fees for consulting, service charges, or project-based income. Investors love it because service businesses can enjoy nice profit margins, especially if you’re offering something unique. Plus, tailoring your services to each client’s needs can really build loyalty and keep them coming back!
Example: Think of a boutique marketing agency charging premium rates for bespoke services. The margins? Super high! But the revenue is tied to the team’s efforts, so scaling up can be tricky.
On the other hand, passive revenue is that beautiful thing where, after you’ve set everything up, you earn money with minimal ongoing effort. We’re talking royalties, affiliate commissions, or subscription fees. Investors are all over passive revenue models because, unlike active income, these streams can grow without much extra work or cost. Plus, recurring income like subscriptions is pure gold for financial forecasting, steady and predictable.
Example: A SaaS (Software as a Service) company with a subscription model rakes in recurring revenue, giving them a reliable cash flow without constantly needing to hustle for new sales.
Software vs. Services: Which Is More Scalable?
When it comes to software products, especially those with a subscription model, scalability is the name of the game. Once the software is developed, you can keep adding new users without spending much more. Investors love this because software businesses can grow fast without ballooning costs. Even better, subscription models offer that steady, reliable revenue that makes everyone happy.
Example: Companies like Salesforce are prime examples of how software businesses can scale up, offering recurring revenue and huge growth potential.
Service-based businesses, on the other hand, can also have amazing profit margins, but scaling them is often more limited because they rely on people power. Investors still find them attractive, though, especially where you are offering specialised services that command higher prices and build long-term client relationships.
Example: A top-notch consultancy firm might bring in big bucks, but its growth is limited by how many consultants it can keep on board.
Recurring vs. Non-Recurring Revenue: What’s Better?
Recurring revenue, like subscriptions or memberships, offers that lovely, consistent stream of income. Investors love it because it makes predicting your revenue and cash flow a breeze, especially if you can show that your customers stick around for a while. High retention rates? Yes, please!
Example: Think of Netflix. Their subscription model not only provides steady cash flow but also supports ongoing growth, no wonder investors are keen on these types of revenue streams.
Non-recurring revenue, like one-time sales or project fees, can be a little more unpredictable. While it’s nice to land a big project or major sale, cash flow can be less consistent, which might make investors a bit nervous. However, those big one-off deals can bring in a hefty chunk of change upfront, which can be very appealing, especially if it provides the cash to develop a new product or service that you can then sell to others.
Example: An e-commerce store may have a massive surge of sales during the holiday season, but face slower periods throughout the year.
B2B vs. B2C vs. B2B2C: Knowing Your Market
B2B (Business-to-Business) companies sell directly to other businesses, often landing larger deals but with longer sales cycles. Investors like this because those high-value contracts can bring in substantial, stable revenue.
Example: A company that sells enterprise software to businesses is a great example of B2B, with those big contracts proving the value.
B2C (Business-to-Consumer) companies sell straight to consumers, which usually means lots of smaller transactions but in higher volumes. Investors love B2C businesses too, especially when they’ve got a strong brand and loyal customers to keep the cash flowing, but it can take a while – and a big marketing budget – to establish a brand, which doesn’t appeal to all investors.
Example: A popular online retailer is a perfect B2C example—selling directly to consumers and scaling up through sheer volume.
B2B2C (Business-to-Business-to-Consumer) companies combine the best of both worlds. They sell to businesses, which then sell to consumers, giving you the reach of B2C but through B2B partnerships. Investors find this appealing because risks and rewards are shared between you and your partners.
Example: A software company providing tools to e-commerce platforms that serve end consumers is a great example of the B2B2C model.
Presenting Your Revenue Streams: What Investors Want to See
When it’s time to show off your revenue streams to investors, focus on three things:
- Profitability: Which of your income streams is making the most cash? Investors want to see where your business is making serious money.
- Scalability: Which streams can grow fast without a major increase in costs? Scalable models are a big win for investors looking for high growth potential.
- Multi-Stream Benefits: A business with diverse revenue streams can manage risks better, which investors love. Show them how your income comes from multiple sources, making their investment less risky!
Why Presentation Is Key
Understanding your revenue streams is one thing, but presenting them clearly to investors? That’s the magic! By showing off how profitable, scalable, and stable your revenue models are, you’re making a rock-solid case for why your startup is worth their investment. A business with multiple income streams isn’t just exciting, it’s safer, and that’s what investors are looking for.
If you are preparing a financial forecast to share with investors, our Guide will help you explore the different elements investors expect to see.
Are you about to launch a funding round but wondering if you’ve covered all the bases? Why not book a free (online) Funding Strategy Workshop to make sure you’ve got everything you need for success? You can also bring any questions you have and we’ll answer them for you.
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