In this series, Dimagi’s Co-Founder & CEO Jonathan Jackson (@jonathanleej) and Senior Director of New Business Shabnam Aggarwal (@shabnamaggarwal) discuss how we continue to look for ways to innovate with the help of a dedicated entrepreneur within the company.
In this piece, Jon explains how and why to differentiate funding from innovative sources from true revenue.
I like this 2015 blog post from Paul Graham and Y Combinator about being default alive or default dead as a business, and what it implies about what you should be doing. Every innovation starts out as default dead and needs to find a way to get to default alive.
For many early stage social impact innovations, initial research and development funding (R&D) is critical. There are many great sources of funding, such as a variety of Grand Challenges, Government research programs, GAVI Infuse, USAID’s Development Innovation Ventures, MIT SOLVE, and Global Innovation Fund.
While this funding is important, it is equally important that early stage ventures do not consider this as real revenue.
Many innovative ideas in the development sector don’t separate these funding sources—a decision that can lead to a particularly skewed perspective on the financial models of early-stage social enterprises. In traditional businesses, you may attract venture capital up front. While the people taking that risk assume a high rate of failure, they also receive a high rate of return on the successful bets.
However, the investment capital is never considered “revenue.” It is an investment and goes on the balance sheet. Two questions that signify often key milestones for early-stage companies are:
“Do you have revenue?” and “Can you stay profitable (and increase your profit)?”
“Do you have revenue?” simply means “has your business sold the offering at all?” If it hasn’t, it is considered “pre-revenue.” After generating revenue, a future milestone is to get to profitability. Once your business has done so comes the question of whether you can stay there (and improve).
The mistake I often see is people conflating innovation grant funding with revenue when they think about the current state of their social business. Instead, they should be thinking of their business as still being “pre-revenue” in terms of the real market they are trying to serve (whether that’s low-income consumers, public sector, etc.). Continuing to raise funding from innovation sources will likely be critical to their success, but it’s not revenue.
Unfortunately, Dimagi didn’t model our finances this way early on in our business. Dimagi and CommCare were very successful in getting innovation funding from a large number of sources to invest in the R&D for CommCare. Because we initially thought of that funding as “revenue,” we thought the path to profitability from CommCare was much closer than it really was.
Profitability took us several extra years—and much more capital than we had initially estimated—because our real revenue was really just a fraction of our estimate when we initially bet on turning CommCare into our primary business line.
Today, we specifically differentiate innovation funding (capital generated by innovative mechanisms) from revenue (the customer buys a product or service because of the direct value it provides). For new initiatives, we know to consider any funding as investment capital and any revenue as starting from zero. In the previous blog in this series, Shabnam alluded to the challenge of proposing high-impact ideas that may not attract donor funding but would have “real” revenue from customers. That idea comes from this experience.
While being diligent about counting “real” revenue can help with modeling how long it will take to get to “default alive” for an idea or enterprise, it is critical to understanding your path to sustainability.