The most common question I get from founders building B2B startups is what metrics they need to achieve in order to raise their Series A. Founders often tell me they are advised that they need to hit the magical $1M in ARR before they raise their Series A. I continue to be surprised by the guidance towards this shallow milestone as I find that it actually offers little insight into a startup’s preparedness for a Series A. I think the answer varies substantially, so I thought I would provide some insight into my mental framework.
B2B SaaS Apps in Established Markets
When you are building a B2B SaaS startup in an established category, you can win against competitors and incumbents by building a better product, but that is usually not enough. Great execution is essential in a competitive market when there are many startups and incumbents vying for market share. In these categories, metrics and traction are a key consideration in the decision making process. The more well-understood, established, and competitive the market, the greater the emphasis on metrics. If you are building a performance management, collaboration, or recruiting app, for example, you better have amazing traction and metrics. Often times the magical $1M in ARR is not good enough to demonstrate good traction and execution. Investors will pay close attention to your funnel efficiency, engagement, unit economics, payback, and other metrics they deem important to demonstrate good execution. Of course, there are exceptions. For example, you may go from $100K in ARR to $1M in ARR in less than 9 months, which would certainly get my attention. But, generally speaking, the more established the market, the higher the need for great execution and, thus, emphasis on metrics.
New Disruptive Products or Markets
On the other extreme, there are startups building products that are so different, new, and innovative, that they do not fit in any traditional market or category. These products make you rethink what is possible or create a new paradigm. Traditional metrics around ARR or traction often do not apply. It is usually too early to judge such startups based on traditional SaaS metrics. Let’s use Airtable1 as an example. When Airtable launched, it was a beautiful product that did not fit into any established category. It was new and different. What was it? A spreadsheet? Not really. A database? Perhaps. A task management tool? Definitely not. A no-code platform? That was not even a thing! What can you do with it? Anything! At the time of the Series A, investors did not invest looking at metrics. They invested because they saw outstanding founders and an exciting product with broad utility. For such startups, the generic advice for Series A metrics and traction does not make sense.
Infrastructure Software & Complex Enterprise Sales
If you are building an infrastructure product or a startup focused on selling to large enterprises, my guidance and thought process is also different. Most infrastructure startups and enterprise tech startups fall short of their potential because either the product fails to deliver substantially better performance, or they simply cannot crack the complicated sales process required to penetrate large enterprises. Long sales cycles, POCs, and competitor FUD (fear, uncertainty, and doubt) can be exhausting. I find that VCs are generally ill-equipped to evaluate the technical merits of such startups. And even if they do a good job with their technical assessment, in the end, what matters is what customers think and how they vote with their wallets. Thus, when I am looking at infrastructure and enterprise tech startups, I certainly care about the product and the opportunity, but even more importantly, I want to know that sophisticated customers are willing to write a sizable check for the product. I usually want to see at least three customers willing to commit at least $100K per year for the product, with some open source companies being the exception. In my experience, after a complicated, high-touch, sales process, which usually involves a POC and 9 months of work to get to an answer, you better be able to extract at least $100K out of a customer. Otherwise, it will be too difficult to scale the company efficiently. Here again, I find the generic $1M ARR guidance not particularly helpful. It may be less, or it may be more. What is important to me is that I have confidence that a startup has demonstrated the ROI to a sophisticated buyer and extracted enough value for their technology and hard work. I am looking for a signal that more capital will actually help a startup scale.
My advice to founders is to ignore the generic $1M ARR guidance. Know who you are, what product you are building, and what will be required to build a big company. Be truthful to yourself and if you are, you will know whether you are ready for the Series A.