The $100,000 Myth
People seem to believe that $100K monthly revenue is the magic fundraising KPI for a Series A. Sometimes it’s £100K or €100K, sometimes it’s recurring revenue, sometimes it’s gross merchandise volume. But it’s always an even 100K. In any case, that’s just wrong, please forget it.
An active VC in London for the past 3 years, I’ve backed 35 companies, and so-far, 12 of them have raised “up rounds” and many of the others are on-track to do so. I’ve been working with a lot of founders on fundraising, and talking to a lot of Series A VCs about what they do and don’t want.
What’s wrong with $100,000?
Now let me tell you why the $100K thing is bunk: I’ve seen a company with no customers or revenue raise from top tier international VCs on a $10M valuation. I’ve seen a company with around $50K in monthly revenue raise from a top-tier international VC with a valuation above $50M, and I’ve seen companies with $300K MRR struggle to pull a round together at all. Ask other VCs, they’ll tell you the same thing. Series A investors are far too intelligent and selective to apply such a simple business rule.
So what are the Series A fundraising KPIs?
Let’s look at it from the investor’s perspective:
- What do Series A VCs want? They want to do investments that can “return the fund.”
- Since a normal Series A check is £3M – £10M, and the funds are £50M – £200+M, that means, after dilution1, they need a 10X – 50X return.
- Since the average Series A valuation is around £30M, that means, assuming some dilution1 in later rounds, they need to believe your company can exit for a £500M – £2B valuation within the lifetime of their fund (e.g. the next 7-10 years).
A £1B+ exit in 7 years? How do you prove that?
It is, of course, impossible to prove. But these are the best signals – the things you should demonstrate with your traction as you begin your raise.
- Large & expanding market – The market exists and is underserved, as proven by other companies, but isn’t too competitive or impenetrable.
KPIs You demonstrate this by showing that your customer base is growing quickly, that the growth is not slowing down, that you’re getting a lot of referrals, CPAs are going down and that your targeting can be quite broad, but still effective. Show, with the diversity of your customer base, that your service’s appeal jumps across national borders, industry/vertical sectors, age and demographic barriers. Back this up with a detailed bottoms-up sizing that shows you understand who you are selling to, what problem you’re solving, and how you plan to reach them.
- Amazing Team – Your company could grow 100X in 10 years, you’ll wake up and have 500 employees. Can you handle that as a leader?
KPIs This is quite subjective. One major “signal” for VCs is to look at your track record of past accomplishments, so highlight previous leadership roles, successes and failures. Also, once you get into due diligence, investors will do extensive interviews and background checks to see how you think about the business and scaling. And of course they will want to spend lots of time with your team to get to know you and see how you work together.
- Good Unit Economics at Scale – Venture businesses grow quickly and perform well because they have such high margins. High COGS are a direct drain on cash, and create operational hassle and limit your speed of growth. For specifics, see my post “What I Learned at PayPal.” (Or check out the Sonos, FitBit and GoPro stock prices since their IPOs).
KPIs Gross margins, realistic estimates of what those margins will look like at scale (including “touch costs” and fully allocated CPA), and a realistic sense for how you will get to those margins as the business grows.
- Strong Product-Market-Fit – Evidence people love you!
KPIs How much of your traffic is via referral/word-of-mouth? Do your retention curves flatten? Do your accounts become more valuable over time (AKA “negative churn”)? How quickly are you signing up new customers? VCs will also check this by speaking to your customers to make sure they are happy now, and their broader needs align with your roadmap.
- Competitive Moat – How does your business systematically lock out competitors? Do you have a strong network effect or an insurmountable first mover advantage? Exclusive access to some kind of resource or customer or supply acquisition channel? How wide is the gap and long will it last?
KPIs Again look at the acquisition dynamics, can you quickly and cheaply acquire, engage and retain customers? Do your customers bring you more customers?
- Downstream Appetite – Will your business need to raise more money? If so, how much and when? Is it the sort of business that Series B, C, D and E investors would want to back? Some markets, rightly or wrongly, are just “cold” to investors. (e.g. ecommerce, ad-tech).
KPIs Amount and growth of later-stage funding into your industry (in Europe or elsewhere), a thoughtful detailed plan that shows how much you will need to raise, when, and possible sources.
- Limited downside – Even though venture capital is famously “high risk,” most VCs, especially in Europe, are looking to limit losses.
KPIs Recurring revenue stream from loyal customers, or very active M&A market for your tech and talent, rare & valuable intellectual property – anything that could provide a “floor.”
So what about the $100,000? Does revenue matter at all?
That number is “helpful but not sufficient.” It should get you investor meetings. Below that threshold, only the most extraordinary companies (e.g. founder’s previous company was very successful) can pull together a big raise. And it provides a large enough data set to divine the more meaningful metrics above. However, that six-figure monthly revenue will go a lot further if you have:
- A high and consistent MoM growth rate
- Very high (e.g. SAAS or Marketplace) gross margins
- Recurring revenue, as in a subscription biz
- A founding team with a track record of success, and big bold goals
- A CEO who can connect the long-term goals with short-term objectives
- Very low CPAs driven by referrals, organic, network effects
- You have an obviously large and expanding market
- Every VC in-town wants into your cap table because of raging FOMO
Speaking of FOMO… that last point is important. Warren Buffett once said “The market is a voting machine in the short term, and a weighing machine in the long term.” He means that in the short-term, investors’ irrational emotions set prices, but over the long term, underlying business value drives returns. (And smart investors like him arbitrage the difference between the two).
Nowhere is that more true than venture. Seed rounds are all about the dream: Charismatic founders with vision; potential and possibility divined from early traction. But by the time you get to Series B, it’s all KPIs: The calculators come out, and valuations must bear an obvious mathematical relationship to revenue, margins and growth. The Series A folks live in that awkward in-between stage, a weird mix of hype and traction, what could be and what is. As a founder hoping to raise, you ignore either at your peril.
Acknowledgements: Huge thanks to a few outside experts who reviewed and commented on this post, including Sean Seton-Rogers of PROfounders Capital, Ben Blume at Atomico, Katie Marrache from JamJar, and 500 Startups’ Rob Neivert for the Silicon Valley perspective.
1 Dilution is when the value of an investor’s equity is reduced as more equity is sold in subsequent fundraises. For a super-simple example: Suppose you own 10% of a company. The whole company is only worth $100, and your portion is worth $10. If that company then raises $100 from another investor, the company is now worth $200, but now you only own 5% of the company. So you could say your ownership has been “diluted” from 10% to 5%.