Not All Revenue Is Good Revenue - 9/10/2026

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📰 Today's Edition: Not All Revenue Is Good Revenue

Fast growth gets celebrated in startup land. More revenue, more customers, more momentum. All of it feels like progress, and in a hot market, investors will mark you up on the back of those numbers without looking too closely at the underlying math.

But there's a version of revenue that is actively hurting your company, and the longer you grow it, the worse the problem gets. Understanding the difference between good and bad revenue isn't just an academic exercise. In a tough fundraising market, it's what separates the companies that survive from the ones that don't.

What does bad revenue actually look like?

The clearest example is a transaction that loses money at the unit level, where the cost of serving each customer exceeds what they pay you.

Pets.com is the textbook case. They were shipping dog food directly to customers, and the cost of postage exceeded what customers were willing to pay. The more they scaled, the more money they lost! Elizabeth’s professor once asked her class full of budding entrepreneurs how they'd fix it. Nobody had an answer. He finally said: you stop selling dog food.

Obvious in hindsight. But a lot of founders are running versions of that same business right now without realizing it. If your customer pays you $100 and it costs you $150 in tokens to deliver the product or service, then you have no credible path to closing that gap. That's bad revenue. Scaling it doesn't fix the problem, it accelerates it.

What about companies like Amazon that were unprofitable for years?

The Amazon comparison comes up every time this topic surfaces. Yes, Amazon had terrible unit economics early on, and yes, they figured it out eventually. 

But two things were true about Amazon that aren't true for most startups: 1) They had access to enormous amounts of patient capital that gave them years to work through the math, and they had a credible, specific story for how unit economics would improve as they scaled: more product categories and more volume. I.e. increase your lifetime value for the same cost, and eventually you start turning a profit. And 2) They were fortunate to eventually release AWS which has much larger margins that helped offset their costs.

If you're in a similar position, you need both of those things. Not just "it will get better at scale" as an assertion, but a clear mechanism for how and when. If your unit economics improve as your network grows, whether because customers spend more per order, or because density reduces your delivery costs, or because your data compounds into something defensible, you need to be able to show that trajectory in your cohorts. Investors in a down market aren't going to take it on faith.

What about payback period?

Even if your unit economics are positive, how long it takes to recover your customer acquisition cost matters enormously. At the earliest stages, investors generally want to see a payback period under six months, meaning within six months of acquiring a customer, you've made back what you spent to get them.

If you're not there, the question isn't whether you can get there eventually. It's whether your cohorts are moving in the right direction. Are your more recent customers cheaper to acquire or more valuable than earlier ones? Is the trend improving? That directional progress is often more convincing than a static number, because it shows you understand the lever and are pulling it.

To be fair, early stage investors are not looking for these specific numbers. In the beginning who knows? They are looking to understand the general strategy even if the specific numbers are not known right now. 

So what is good revenue?

Good revenue is when your cost to acquire a customer plus your cost to serve them is less than what they'll pay you, and that math resolves within a reasonable timeframe. You might not be immediately profitable on every customer, and there's often a period where you're out of pocket before you earn it back, but within six months or so, the economics work. 

That kind of revenue you keep and grow. You can even use revenue-based financing to smooth out the cash timing without giving up equity.

What do you do if you have bad revenue?

For companies without strong network effects, the better move is usually to cut the bad revenue rather than keep growing it.

A hard call. Cutting revenue means your top-line numbers look worse, which can feel like death during a fundraise. But growing unprofitable revenue just digs the hole deeper, and eventually you run out of road. 

If your company doesn't need investors to survive, if you can get to profitability or close to it by cutting what doesn't work and focusing on what does, that's a stronger position than growing fast and burning through cash hoping the next round comes in time.

You started your company for yourself, not for investors. If there were no investors around, would you keep growing revenue that loses money on every transaction? Probably not. So the first step, whatever you decide, is to actually know which revenue is which.

Until next time,

Dunky, the "good revenue" hippocorn

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