“What do most investors get wrong?” I posed this question to a top investor this week. His answer: investing in companies with no revenue.

Only about 10% of startups ever get a product out, he estimates. Of those, only around 10% will ever make a penny in revenue.

This puts the odds of a company ever actually signing a paying customer at 1%.

It’s what David Sacks calls the penny gap, and it’s real. Day after day, most of the startups in my inbox don’t have a dime of revenue.

How to Make Investing 10X Easier

Here’s how I make my job a lot easier: pass on all of those.

For a startup to ever matter, it needs paying customers. Lots of them.

Investing in revenue-generating companies removes a ton of zeroes from your portfolio. That drastically improves returns.

Are You Solving a Real Problem?

People can tell you they love your product all day long. It doesn’t cost them anything.

But when it comes time to plunk down their credit card, they ghost you. If they’re actually willing to hand over their hard earned money, you must be solving a real problem.

But I Have Tons of Users!

Users and actual paying customers are two different things.

Someone who is willing to pay really cares about your product. That’s the person you need to please.

Looky-loos who won’t pay don’t matter. And they’ll send you off on wild goose chases, telling you to build this feature or change that.

What if This Is My Only Chance to Invest?

Here’s what no one tells new angels: startups are always raising money.

The less experienced you are, the more founders will use FOMO to scare you. If you don’t invest now, you’ll miss the opportunity forever!

Dollar to a dime, that same founder will be pitching you 6 months from now and a year from now. Startups burn money — so they have to raise constantly.

Maybe this really is the next Uber. But if so, it won’t hurt to wait 6 months and let them rack up a few sales.

How Much Revenue Is Enough?

This depends on the investor. Personally, I like to see $200,000-500,000 a year in revenue.

At that level, you have a variety of customers and enough track record to show a growth trend.

Looking back on my 26 investments, the most successful ones had ARR of at least $200,000.

Just recently, I invested in a startup with over $1 million ARR growing fast. Sure enough, they’ve already grown ARR another 70% and raised at more than twice the valuation I paid.

When I’ve invested earlier in companies that had just a couple thousand a month in revenue, the results were poor.

If you’re pitching investors, find out how much revenue they’re looking for. When you hit that milestone, send them a message and let them know!

Wrap-Up

Only investing in revenue-generating companies will massively improve your returns. I’ve invested in 26 companies so far without a single 0, partly because I stuck to real businesses with cash coming in the door.

Whether you’re a founder or an investor, if you follow the money, the results will follow!

Do you focus on revenue? Why or why not?

Leave a comment and let us know!

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