Startups shouldn’t care about revenue

And data teams should make sure they don’t.

Selling your soul for thirty pieces of silver.

The stock market is down again, and that can only mean two things: First, woo woo technical analysts are posting candlestick charts of stock prices, randomly drawing lines between points, circling the days when Mercury was in retrograde, calling it “the death cross,” and announcing that it’s time to buy again because the 13-session countdown pattern has broken a resistance band; and second, venture capitalists are falling over themselves to tweet out apocalyptic R.I.P Good Times predictions. 

In the latter case, the story will play out as it always has. VCs will recycle euphemisms about “opportunities to trim the fat;”¹ they’ll trot out lazy stories about how the most enduring companies are forged in the hottest fires; and they’ll scold the unchecked enthusiasm and unrealistic valuations of the last eighteen months, as if they didn’t bankroll the whole party.  

Substantively, their actual advice will be simple: Protect your cash. Raise it if you can, spend it cautiously, and do whatever you can to make more of it. 

On one hand, this prescription is obvious, and obviously correct. Revenue is an inescapable gravity that pulls every company—no matter how high-flying they once were—back to earth at some point. Businesses can’t outlast their bank account.²

On the other hand, taken too directly, this can be a dangerous suggestion for a lot of startups, especially young ones. Like raising venture capital,³ revenue is a one-way door—once you use it as the scale with which you weigh yourself, you never step off. For early stage companies that are still looking for their way, they should focus on the long-term value they can provide, not the short-term value they can extract. And a stock market panic doesn’t change that.

“Pre-revenue”

I’ve always heard that doctors struggle to watch shows like Gray’s Anatomy because the medical technobabble is too ridiculous to overlook. I struggled to watch HBO’s Silicon Valley for the exact opposite reason—it was too real. 

In one particularly scathing scene, several of the characters are talking about how their company can make money. Russ Hanneman, the belligerent embodiment of Silicon Valley’s id, cuts them off: “If you show revenue, people will ask how much, and it’ll never be enough…It’s not about how much you earn, but what you’re worth.” Though the bit goes a little too far—Hanneman suggests that you actually want to lose money—his main point doesn’t miss: In Silicon Valley, perception is all that matters.

How do people, and specifically venture capitalists, perceive an early-stage company that’s still taking shape? The dirty secret is that it’s through whatever lens the company presents itself. If a company leads with how much money it makes, VCs will score it on revenue growth. If a company leads with daily active users, VCs will score it on product adoption. If a company leads with community enthusiasm, VCs will score it on the chatter they hear in the ecosystem. Investors may prod at the other benchmarks, but any chart that’s sufficiently up and to the right can tell a compelling narrative, and fund a business to keep building. 

There is astonishing possibility in this dynamic. It’s the manifestation of Silicon Valley’s almost foolish optimism, and the magic that lets companies focus on solving problems without worrying too much about mining money out of user excitement. It is what lets us start with an idea, not an accountant, and what lets us dream in years, not months and quarters. 

This isn’t to say it’s all fair and good; it is not. But it’s what we have. It’s the sling that gives upstart Davids a fighting chance against corporate Goliaths; the rule that we can play by that many of our opponents can’t. We should hold onto it dearly.⁴

This holds true in bear markets and recessions. In public markets, a “flight to safety” drives investors away from risky assets and equities into safer, slower growth securities like bonds and large cap stocks. For VCs, such a shift doesn’t make sense. The entire investment strategy in venture capital is built around hitting a few home runs on high-risk, long-term bets. Though downturns put pressure on startup valuations, this rule still applies—it’s either go big, or get profitable. Companies shouldn’t get caught in the middle by half-heartedly gesturing towards the latter before their revenue growth proves they’re on a path to the former.

Why not revenue?

This raises the question though—why not focus on revenue? It will eventually matter, either to VCs, to public markets, or to a bank account that’s running dry. Is it not better to preempt all this and build a healthy financial business as soon as possible?

I can’t speak to how institutional investors would answer this question, though Silicon Valley clearly has no problem backstopping yawning financial losses for a very long time. But, on the other side of the table, inside the startup and, particularly, on a data team, I can say one thing definitely: Revenue is a bad KPI.

We like to think of “north star metrics” as the scientific underpinnings of our businesses. They separate the truth from our opinions, and help us make objective, reasoned decisions. In practice, however, they’re often lousy at both. Instead, the real value of a key metric is something much squishier: alignment and inspiration. It translates a vague mission statement—connect the world, make commerce better, empower healthier lives—that could be interpreted in dozens of different ways into something concrete. It provides a tangible means to a vision’s nebulous ends.

This only works, however, under three conditions. First, key metrics have to be singular. Companies can’t chase dozens of performance indicators, with each team having their own preferred set. If they do, everyone ends up confused; at worst, people proxy their opinions through weaponized KPIs.⁵ This doesn’t end arguments; it escalates them.

Second, key metrics have to feel within reach. If they’re at the end of a long chain of dominos—this happens, and then this happens, and then this happens, and then the metric improves—people drift from them.⁶ Or, if decisions are tied to metrics via a tenuous series of causes and effects, any decision can be justified, just as a sufficiently complex conspiracy theory can find a path to any conclusion it needs to.

Finally, key metrics have to endure. They can’t encourage halting starts and stops, or favor penny-wise improvements over pound-foolish sacrifices. They need to point us to the spot we want to be on the horizon, not compel us to look at our feet. 

Revenue fails on all three fronts. Revenue goals are often set month to month, and quarter to quarter. Moreover, for most employees inside a startup, it’s a distant and delayed metric that offers no guidance on how to make decisions, no feedback on the quality of those decisions, and no reward if those decisions are correct. In need of other ways to measure progress, or in search of a way to ascribe more meaning to what they do, people create intermediate metrics, splintering the organization’s focus across different—and often misaligned—goals. 

For alternative metrics, smarter people than me have lots of ideas. The only point I’d add—for the pedantic data people like me—is that no metric is perfect. It can always be gamed. There can always be scenarios in which it goes up, and something bad still happens. There will always be measurement errors. Pointing these things out is neither clever nor helpful; to the contrary, it undermines the exact thing the metric is meant to accomplish, which is to rally people around a single direction. A simple metric presented with conviction is far better than a detailed one presented with precision.

For as long as you can

For any company wondering which metric matters most to them, there’s an easy test to figure it out. Imagine it’s the end of the quarter, and you missed every target except one. Which target would you choose to hit?

For as long as you can, make your answer something other than revenue. For as long as you can, don’t start pitch decks and board slides with revenue numbers. For as long as you can, start the story of your company’s progress around another metric. For as long as you can, measure your success using a better scale. For as long as you can, celebrate hitting revenue goals, but treat it as the byproduct of bolder ambitions.

Simple as it sounds, this isn’t an easy fight. Executives will always want financial dashboards; the hard work of generating revenue should be applauded and rewarded; P&L statements will always be lurking somewhere in board presentations. In conversations about company performance, if there is no loud and persistent alternative, revenue metrics will always fill the void. 

This is true in good times, and it’s especially true now, during moments of market uncertainty. But no matter how top of mind revenue is for a leadership team, to most people inside a startup, it’s not a useful fixation. And as data teams, it’s our job to make sure there’s something better to pay attention to. 

1. Kudos to Scale for calling this out in the early days of the pandemic. As Rory O'Driscoll said, “Phrases like ‘cut the burn’, thrown out in a cavalier pseudo-tough fashion, do not capture the impact of this on the people involved.”

2. That said, it recently occurred to me that, for as much as Silicon Valley types like to brand themselves as business savants and ridicule government institutions for not having the discipline to manage their balance sheets, we also celebrate a lot of people who, in all likelihood, have never worked for a company that actually made money. Which made me curious—in how many years of your professional career did your employer turn a profit? I’ll start: One year, out of thirteen. Take the survey! [ An update: The results!}

3. Linked to with great reluctance and self-loathing.

4. Lest this be interpreted as cynical advice to fly too close to the sun (or to run an outright Ponzi scheme), the point is not to build nothing of value. The point is that companies have more leeway in how they define that value than they often think. 

5. “New customers is a key metric for us this year, so I think we should lower our prices.”

“Well, revenue growth is also a key metric, so I think we should raise our prices.”

6. My first job out of school was at a think tank in Washington, D.C., where our goal was to influence policy decisions that safeguard global peace and security. The line between my work and global peace was roughly as follows: I write a paper that my boss likes; my boss publishes it; some low-level Fed staffer finds it; that low-level staffer shares it with a high-level staffer; the high-level staffer makes of note of it in their report to Fed Board; someone on the board reads the report; Fed policy changes because of the report; the change helps stabilize the global economy; international peace (e.g., collect underpants → ? → ? → ? → ? → ? → ? → world peace). Needless to say, I didn’t feel attached to the mission.