Why Defining Value Creation Revenue Now is Crucial for Your Exit Later
It’s a lesson people tend to learn way too late in the game: Not all revenue streams are created equal.
All business leaders know that growth isn’t a given. But what many fail to recognize is that certain types of growth are more valuable than others, especially when you’re looking at a long-term exit strategy.
We talk a lot at Work.software about VCR, or Value Creation Revenue. It refers to revenue that’s valued by the company or stakeholders at a higher rate. In other words, you’re filtering out the revenue streams that bring in money but don’t add much meaningful value to the selling price of your business.
Let’s back up. When things are just getting up and running, it’s all about cash flow -- getting to a point where you have enough money in the bank to pay the bills. From there, you move on to a new giant goalpost, which is profit, and it’s only once profit is in alignment that you can zero in on revenue. These are all huge hurdles, and it feels great to clear them, but the work doesn’t stop there. In fact, your next steps are what separates a pretty good business from an excellent one.
With revenue front of mind, you’re going to lean into different types of strategies that, all together, accelerate your bottom line in that perfect hockey stick shape. But just because the numbers look good and the graphs are going the right direction doesn’t mean investors will be convinced of long-term viability. In order to prove that to them, you’ll need to be able to point to your VCR -- the streams of revenue that will hold firm no matter how the landscape changes over time.
Take my own history. I created a highly successful SaaS company and built in multiple cash flow streams. Among those streams were, for example, the ability to sell hardware, or the ability to provide professional services like content creation. And although those revenue streams were relevant in some areas of the business, they didn’t contribute to the revenue that interested potential buyers. The buyers were looking almost exclusively at revenue from annually-recurring subscriptions to our software. It was that stream -- our value-creating revenue -- that ultimately determined our selling price.
Determining your VCR may sound daunting, but it’s much simpler than you’d think. You’re assessing the different means by which your business generates money, and you’re zeroing in on the one or few that make you a must-buy for investors. That doesn’t mean you’ll begin ignoring your other revenue streams, but rather that you’ll devote the appropriate amount of attention and resources to the ones that are going to strengthen your VCR.
Focusing on VCR is a line of thinking that takes business planning to the next level. It saves you from disappointing conversations down the road with investors who seem interested but then waffle out when they see the stream-by-stream breakdown. When it comes time to have those exit conversations, you’re going to want to be able to point to your VCR and say: “There it is. That’s why you want us.”
ABOUT THE AUTHOR
David Wible is one of the founding partners of Work.software, and has been helping companies improve performance for over 25 years. Dave's portfolio of experiences and solutions are key to defining challenges and presenting solutions. Along with William Chufo, they successfully exited their SaaS digital media company for a significant return to investors, and earned themselves a spot in the 17% Club.