Demand Durability
How the Money Comes In, and Why It Matters
Recurring revenue looks great on paper. However, real durability can come from something deeper. This post has a few thoughts on how I try to see through the structure and into the engine behind demand.
Recurring revenue gets a lot of reverence. Somewhere along the way, it stopped being just a pricing structure and became a stand-in for quality, predictability, and momentum. It can feel like comfort food for board meetings or a soothing panacea for diligence sessions.
But when you dig into the actual mechanics of how businesses make money, and what makes that money stick around, the surface story can start to unravel. Contracts are helpful, sure. And predictable billing cycles make life easier. But not all recurring revenue behaves the same, and not all episodic revenue is inherently risky. Some businesses generate a steady rhythm of opportunity without any of the structural trappings that usually get celebrated. Others have all the right mechanics on paper, and still feel like they’re one customer away from trouble.
It’s easy, especially under pressure, to trust the reassuring precision of a spreadsheet rather than dig into the messy reality beneath. I’ve been guilty of this myself. It’s a mistake. What really matters, especially if you’re in the business of evaluating or building companies, is understanding where the next sale comes from, and whether there’s a dependable pattern behind it. That doesn’t always show up in a revenue line item. Sometimes it shows up in a workflow, or a decision tree, or the gravitational effect of being in the right place within someone else’s ecosystem.
Understanding the Relationship
Let me step back to the simplest frame where we can all find agreement: every business survives by convincing someone, somewhere, to part with cash. An easy way to segment at this step is based on the cadence of those payments.
First, there is the fully recurring stream, such as a gym membership or a long‑term software-as-a-service agreement, anchored by a contract and drafted to renew automatically. The next rung on the ladder would be re‑occurring revenue: money that returns with reassuring regularity, typically annually at a minimum, yet floats free of hard obligations. Think of things like a tax accountant, a preventative‑maintenance service, or that one industry conference you go to without fail each and every year. Finally there is the episodic or project‑based engagement, discrete and self‑contained, engineered to end but perfectly capable of resurfacing when the need re‑emerges.
Naming these patterns is useful because it gives us a common language, but the danger is stopping at the name. Recurring revenue naturally steals the spotlight for obvious reasons: it models better, reassures lenders, and props up valuations. Where we need to tread carefully is in the supposed promise of durability from these types of customer relationships. As much as we’d like to stop here, it’s important to understand that predictability lives more in the motives, constraints, and habits that keep a customer coming back.
Looking Past the Label
It’s still possible that a recurring revenue model can be disrupted and that a project-based model can endure. Context matters, customer behavior matters, and end markets matter.
Take a SaaS business serving home renovation contractors during the 2008 financial crisis. Many of these businesses had growing numbers of customers, stable-looking churn metrics, and strong net revenue retention, until the bottom fell out of the housing market. The model didn’t offer protection once demand collapsed.
Contrast that with marketing agencies supporting higher education companies at the same time. These businesses operated without strong contracts, often billing month-to-month. Yet their demand increased as colleges and universities pushed harder to recruit students and those experiencing layoffs looked to upskill and wait out the job market recovery. Their revenue looked unstructured, but their clients kept showing up.
A similar story plays out in consumer gadgets. Think about the cottage industry that gets a boost every September when Apple releases a new phone. A small producer of protective cases earns revenue that is entirely episodic, which at first glance looks fragile. Yet because Apple all but guarantees a hardware refresh each year, demand resurfaces in a predictable way. This “one-time” model turns out to be more predictable than plenty of monthly subscriptions I’ve seen. Durability, again, comes from the ecosystem’s staying power, not the invoice format.
The structure of revenue is only part of the picture. Historical performance, especially when viewed through a short-term lens, can create a false sense of durability. A good-looking cohort chart from the past two years may not be enough to answer questions about the next five.
I was reminded of this in early 2023, during a visit with a digital marketing agency that had grown quickly by focusing on cybersecurity startups. The firm had ridden a strong wave of demand and was starting to feel the strain that comes when scale outruns infrastructure. They were looking to partner with a private equity firm that could help stabilize the business and support continued growth. The team was sharp and candid, and the metrics looked good: recurring revenue, expanding margins, strong net retention.
But something about the story felt too exposed. The entire client base was venture-backed startups, many of them early-stage Series A and Series B, most still in growth-at-all-costs mode. We had trouble getting comfortable with the idea that this was going to last. So, we told the shareholders that timing wasn’t quite right, and that we would revisit sometime in the future.
Within about 12 months, our concerns played out. The startup funding environment tightened, and venture capital firms started pushing their portfolio companies toward profitability. Marketing budgets were cut, demand for these services dried up, and the agency lost nearly half of its clients. This reinforced that what we’re really underwriting is the stability in the customer base that keeps revenue flowing, and how resilient those customers can be when conditions change.
Reading the Demand Durability Drivers
Underwriting demand asks us to set the invoices aside for a moment and identify the deeper trends and behavioral influences. It helps to ask questions like why do customers decide to buy at all, how much room might be in their budgets, and what gets protected (or sacrificed) when cash grows tight.
A simple place to start is the behavior of the end-market itself: cyclicality in construction, for instance, tends to rise and fall with housing starts and changing interest-rate expectations, while healthcare or higher-education demand tends to move on a slower, more regulated tide, each carrying its own blend of risk and upside. Here, historical data reigns supreme since economic models are notoriously bad at accurate forecasts. Try to find data from previous recessions or periods of industry disruption to help understand and craft the right narrative.
Next on your list might be buying behavior: an offering woven into the mechanics of daily operations (think scheduling software that keeps a hospital ward staffed) holds on tight when storms hit, whereas a nice-to-have tool for brainstorming or brand polish is the first to slip off the deck when cost-cutting begins. First-hand customer interviews are critical for understanding these dynamics.
Finally, there is the question of concentration. A company may boast a hundred logos on a slide, yet if ninety of them share the same zip code or balance sheet exposure, a single shock can split the ground beneath all of them at once, turning apparent diversification into a solitary fault line. Most importantly, make sure there is a plan in place to address any of these issues after you make your investment, and to do so rapidly.
Seeing these forces together gives us a clearer sense of whether revenue is firmly anchored. Durability is rarely a function of structure alone; it lives in the everyday frictions and necessities that keep a customer from walking away even when every spreadsheet says they probably should.
Value Chain Attachment
Some businesses don’t fit within typical labels like recurring or project-based. They exist because they are embedded in someone else’s system. They provide services or components that support a broader platform, product, or operational process.
These are value chain businesses. They may not own the end customer, but they are essential to the ecosystem. This could look like a firm implementing software for hospital workforce management, a parts supplier that is complimentary to industrial equipment manufacturers, or a specialist handling regulatory documentation for complex supply chains.
This category often gets overlooked. These aren’t flashy business models. They don’t claim to reinvent markets or pitch themselves as “the next big platform.” They don’t usually appear on tech conference keynote stages. But their durability can often exceed that of the companies chasing headlines.
What these businesses do well is position themselves just upstream or downstream of something much larger: a dominant platform, a heavily regulated process, or a critical product. Their growth is less about winning customers one by one and more about riding the momentum of a system that is already expanding. That kind of structural alignment can create surprisingly stable demand.
Durability here depends on three things: the health of the underlying ecosystem, the importance of the company’s role within it, and the resilience of the end market. In business-to-business firms, that might mean serving an industry with slow procurement cycles and long-term infrastructure planning. In business-to-consumer, it could involve anchoring to consumer staples rather than discretionary spend.
Because these businesses don’t usually own the full customer relationship, they tend to fly under the radar. But in exchange, they often face less volatility. They are less exposed to sudden swings in buyer preferences, less dependent on brand affinity, and less vulnerable to the existential anxiety that comes with trying to outcompete entrenched platforms.
There is also less pressure to reinvent the wheel. In a world obsessed with disruption, these businesses benefit by being indispensable. They generate consistent cash flows, often with lower capital intensity and lower risk than models that depend on novelty or speed.
What makes them powerful is precisely what makes them easy to miss: they grow by holding steady while the ecosystem around them proliferates. It makes us wonder if durability hides in the shadows because we seldom bother to look for it.
A Framework
The goal here isn’t to define permanent categories. Businesses evolve: a service that begins as project-based may become embedded in monthly workflows over time. A contract may appear stable until the customer’s priorities change. And so, instead of trying to craft some sort of scoring system, I am trying to capture a framework and a way of thinking. It should help surface better questions: How does this business generate revenue? Where does demand originate? What would need to change for that demand to weaken or vanish?
Recurring revenue is appealing, but the appeal isn’t in the label, it instead lies in the confidence you can place in future behavior. Demand that returns because of convenience, compliance, habit, or necessity carries different risks and opportunities. Underwriting begins with understanding those forces and the time horizon across which they’re likely to hold.
What matters more than how the money comes in is why it keeps coming. Durable businesses are those with repeatable access to demand. Sometimes that means locked-in contracts. More often, it means being well-positioned to benefit from structural forces that renew themselves: workflows that need constant support, ecosystems that keep expanding, or customer segments that return because they have few better options.
In that light, value chain businesses deserve more attention. They aren’t usually described as “category-defining,” but they often operate as vital arteries in multi-billion-dollar systems. They create consistent cash flow by being necessary to something larger. And unlike companies competing to become the next platform or disruptor, they don’t have to convince anyone to change behavior or switch allegiance.
Underwriting demand isn’t about putting businesses in neat boxes labeled “recurring” or “not.” It’s about understanding what drives a steady stream of opportunities, and how long that stream is likely to keep flowing. When you look through that lens, the question changes.
PS: I’m still refining this framework, so I’m curious how others think about it, especially in sectors where the demand signals are harder to read. If something in here resonates with you (or doesn’t), I’d love to hear from you.