Breaking down your REVs.

Revenue. It’s the most important factor to any business, but it’s also a catch-all word that can mean almost anything. We all want to talk about big revenue numbers, but in the land of REVs all sales are not the same, and understanding what $-related metrics are relevant for your business is essential.

Instead of getting lost in semantics, let’s embrace the nuance and define what Revenue /ˈrevəˌn(y)o͞o/ really means.

GMV / GTV

So ‘revenue’ means any money my company touches, right? Wrong. Many companies facilitate transactions and channel money through their platforms which is NOT Revenue. They may very well be part of a transaction with your consumer, but that doesn’t necessarily justify them as Revenue to your company. Instead such transactions are defined as Gross Merchandise Value (GMV) or Gross Transaction Value (GTV), and refers to the total sales volume transacting through the platform. It is basically the aggregate spend by the company’s users during a defined time-period. This is frequently seen in marketplaces like Airbnb, where GMV is the booking price paid by the users, while Revenue is Airbnb’s commission on the transaction. For payment platforms like iZettle, GTV means total money processed, and Revenue is rather is the single digit percentage points collected by the company. Needless to say, don’t be a n00b and mistake your GMV or GTV as your Revenue!

MRR & ARR

Recurring Revenue is a business model which involves selling someone access to a product over time – you see this frequently used in software sales. This metric is attractive by the financial market because it involves predictability and to some extent stickiness.

Recurring Revenue is often referenced against time frames. Monthly Recurring Revenue (MRR) is your total REVs during a month, and Annual Recurring Revenue (ARR) is simply your MRR multiplied by 12. However, all companies does not have Recurring Revenue. Companies who don’t operate with a recurring nature of their revenue instead have “Monthly Sales” or “Monthly Revenue”. Uber’s REVs from their ride-sharing business is not MRR, since each trip is purchased in a non-recurring nature (although many of us use their service frequently enough to question the non-recurring nature of it…). Great companies can be built using recurring and non-recurring REVs. Hence don’t refer to your monthly revenue as MRR unless your business model truly justifies this.

New, Expansion, Downgrades & Cancelled MRR

If you operate a business with Recurring Revenue, it’s critical for you to understand and break down the nature of such REVs. The natural way to look at your aggregated MRR is to separate this into New, Expansion, Downgrade and Cancelled MRR. New MRR is additional MRR from new clients who you haven’t done business with before. Expansion MRR is additional MRR from existing customers often triggered by upgrades. Downgrade MRR is the opposite of Expansion MRR with existing customers spending less money with you this month compared to before. And lastly Cancelled MRR is existing customers who stopped using your services during this month. We naturally like businesses which has a lot of New and Expansion Revenue. 

Contract Value (TCV & ACV)

When a company closes a large sale, especially in enterprise environments, there is often a contract duration to the transaction. Total Contract Value (TCV) is the total value of such contract, meaning the total money the client will spend with your company during its duration. Annual Contract Value (ACV) instead measures the total money they commit to spending with your company over a 12-months period, in case the expected client engagement exceeds 12 months.

Even if you closed a sale and in the same month collected the full TCV, you most often most likely should not account for all such Revenue in the same month.

Instead with Contract Values and durations, accounting principles becomes highly relevant. Often this means recognising Revenue on a monthly basis. Exactly how and when Revenue is recognized is regulated by official accounting standards (GAAP in the US & IFRS in Europe). But in, short Contract Value and collected $ isn’t REVs.

Net Revenue & Gross Margin

To determine the health of your business you should also not look purely at your Revenue. Instead also you have to understand your Net Revenue and Gross Margins. Net Revenue is the actual money remaning after you deducting the cost of selling such products from your (Gross) Revenue. This is mostly applicable for ecommerce companies where your Net Revenue often involves deducting costs associated with discounts and returns.

Gross Margin is the percentage of total sales that the company retains after deducting costs of goods and services associated with producing the items sold. It is calculated by taking Revenue minus its cost of goods sold, divided by Revenue. The higher the percentage, the more the company retains on each dollar it makes. Many software business experience high Gross Margins around 70-90%, while ecommerce companies often experience significantly lower gross margins in the 20-40% range because of the relative low margins they have on the products they sell. Hence, depending on the company ratio between (Gross) Revenue, Net Revenue and Gross Margin the same Revenue amount can mean very different things.

Revenue is important. It’s not about knowing the right metrics to talk to VCs about, it’s about understanding your business.

If successful, you may not even need external funding to pursue your dream. But even if you plan on raising external capital, the key here is to get REVs.

💪👊

via GIPHY

NYC vs. SF: How do you decide what’s right for your US Expansion?

When European Entrepreneurs really hit the growth button the U.S. is usually the most important expansion target. It’s a natural location: there’s a massive homogenous market. It’s the home to hundreds of the world’s top corporations. It’s an important market for company value creation. And the big money investors seem to live on one street.

But the big question for entrepreneurs eyeing a US expansion is which coast to end up on? The U.S. is huge! And there are many different places you could set down your flag. Austin, Boulder, Boston, LA and a few other hubs are great. But let’s be honest. Most of us coming over the Atlantic are thinking about either the San Francisco Bay Area or New York City. In fact those are the only two locations in the U.S. from which Creandum’s portfolio has chosen to expand. So which one do you choose?

The first question you need to ask yourself is (0) do you have product/market fit? Because without it, you shouldn’t be going anywhere. Stay put, iterate and find something which is ready for growth. Once you’re confident about your product-market-fit, the natural question to ask is what companies or industries do you need to be physically close to hire talent and best hit your market? A good number of startups can benefit by being physically close to (1) Facebook, Google, or Apple if they work directly with these companies, making SF a natural choice.

But moving forward, (2) if you’re in the social, messaging and community space, or if you’re doing hardware or bleeding edge tech like AI, SF is the place to be. Out of the Creandum portfolio Neo Technology (advanced database tech), Narrative (hardware) and Vivino (community + proximity to the NorCal’s Wine Country) are some example of a startups that has moved there.

New York becomes another strong draw (3) for startups in the media, entertainment, ad tech, fashion, e-commerce, digital health, or fintech areas. Tictail (e-commerce), Spotify (media & entertainment) are two examples of startups that have forgone the draw of the Valley to set up shop in NYC.

But outside of the industry you operate in, thinking about your needs to hire local talent is another issue to consider. If you’re hiring a big team (4), SF is probably one of the most expensive places in the world to do that, and New York clocks in a little cheaper. However, if you’re hiring highly technical talent then SF (and probably south in the Bay Area) is the place to find that talent pool (5).

Finally, a very important thing to consider is how much you will need to interact with your U.S. team in their daily operations and talk directly with the team back home (6). New York is six hours away from CET and SF is nine hours away. The difference is massive. At 8am in NYC it’s 2pm in Stockholm and Berlin, and you’ve got a good couple of hours before anyone starts feeling any pain. However, at 8am in SF it’s already 5pm in Central Europe. If you’re doing the SF to CET coordination, people will have to get up early or work late which is part of startup life, but you may want to think through what that means if it becomes part of your daily operational structure. With the company I co-founded, Wrapp, we had an office in both NYC and SF during a certain time, and the pain of coordination between Stockholm and those offices was massively different with benefit to NYC. 

There are a million other questions we could have included, but these and most other questions aren’t deal breakers – there’s lots to evaluate back and forth before you decide on a location.

💪👊