How Much Revenue Does Your Startup Need to Raise a Series A Round?
Benchmarking Your Revenue to Raise a Series A
Last week, I outlined some of the main factors that can help you avoid the Series A crunch. The reality is fundraising for your startup isn’t getting any easier anytime soon. And as deals become more VC-friendly, it’s essential to arm yourself with all the information necessary to be prepared at the negotiating table.
Let’s start out with a hard truth: sometimes revenue doesn’t matter much in a successful Series A raise. If you’re a seasoned SaaS entrepreneur with a strong team, raising your next round will be much easier than for a first-time founder. Many VCs will place the greatest emphasis on past success for the best indicator of future results—whether or not a company’s unit economics are solid or if they’ve reached the proper revenue benchmarks. Jason Lemkin claims he’d comfortably invest in a pre-launch SaaS company with $0 in ARR if the team is strong and experienced and the market and opportunity are huge. “This makes sense as in many cases, SaaS is an execution play,” Lemkin wrote on Quora. “Put the best team into a strong, upcoming (or disruptable, large market), and that’s a good bet to make.”
But if you haven’t birthed any unicorns or shepherded any startups to 10x exits already, your benchmarks may be a little more concrete. In the same response, Lemkin wrote that he looks for unproven, bootstrapped startups to hit about $2 million in ARR. In an interview with SaaStr, Tomasz Tunguz estimated a lower mark. Tunguz said most of the founders he speaks with are looking to hit somewhere between $75,000 to $125,000 (or $900,000 to $1.5 million in ARR) in MRR before making their Series A pitch. Despite the wide range, it seems pretty tough for any new founder to conduct a strong Series A round without revenue nearing $1 million ARR in today’s fundraising environment. Without that, you’re going to have to lean more heavily on pitching your market opportunity or product superiority.
Beyond your revenue benchmarks , investors are also going to be eager to see how quickly your startup is growing. Here’s the formula to calculate your monthly growth rate:
Month-over-month growth = (This month – Last month) / (Last month)
If your startup measures year-over-year or week-over-week growth instead, simply substitute the annually or weekly number into the monthly slot and the formula works the same.
Like MRR, your target monthly growth rate for earning attention from Series A VCs will vary. However, Tunguz puts 15-20% monthly growth as a solid range to hit in order to attract investors.Be careful to chart out your monthly growth over an extended period to ensure that you aren’t experiencing inconsistent results or your perceived long-term growth isn’t hiding a trend toward declining numbers. Potential investors are going to interrogate those numbers and examine trends. You don’t want to be the last person in the room to vet your own results.
If you square away around $1 million in revenue and experience a consistent 15%+ monthly growth rate, you could reasonably raise at a $10-20 million valuation. And since most VCs will want to take about 20 percent equity in your Series A round, you can expect to raise $4 million at a $16 million pre-money valuation or $5 million at a $20 million valuation.
If you’re conducting responsible, consistent financial planning, you can start to forecast when your startup will be ready for its Series A. Talk to your seed investors early to get their feedback on your plans and brainstorm strategies to maintain or increase your revenue growth. Also, your investors likely see a variety of deals on a regular basis, while you’ll maybe pitch a few times a year. Lean on their expertise to identify other intangible factors in the fundraising market and prepare yourself for a successful round.