The Amount Of Revenue Your Startup Should Generate Before Looking For Investors (2024)

In the past 20 years venture funding has completely changed. To create a fundraising strategy that fits the new model, let’s take a look at the root cause of this shift.

In the ‘90s, it went like this:

• Series A funding rounds gave you $5 million just for an idea to see if it would fly.
• Series B was $10 million to take what worked and build the kernel of a business.
• Series C was $30 million to start scaling the business.

Here’s how it goes today:

A seed round nets you $1 million to $2 million if you have an idea, a working product, $50,000-plus per month in revenue, and strong growth numbers. That’s all before Series A.

What caused the shift?

First, it’s now cheaper than ever to start a tech company out-of-pocket. At small scale, cloud computing is free. In addition, the potential customer base is global from the start because social media allows great content to reach millions without fees. Also, business processes, like bookkeeping and credit card transactions, are easy and low-cost. To sum it up, starting a business is now accessible to more people than it was before.

To this easy access, add the fact that starting a company is now cool. Just walk by any magazine rack or log into any news site, and you’re likely to find entrepreneurs and founders plastered all over the cover or homepage. from Facebook founder and CEO Mark Zuckerberg to SpaceX’s founder and CEO Elon Musk. They are celebrated widely for their achievements across society. When I started my first company over a decade ago, people said, “Oh, you just mean you don’t have a job?”; Now it’s all the rage. Because it’s cheap to start, kids in their 20s with no experience can afford to try—so they do—in droves across the world. Combined with 1,000 times accessibility, you get a Cambrian explosion of companies.

Yet, this doesn’t mean companies are any more likely to succeed. Even though the absolute number of successes has increased, the number of investors has not increased. For the past five years, in fact, the number of deals done by VC firms has been generally flat (around 1,000 per quarter). So the demand of companies that could benefit from funding wildly out-strips the supply of money.

With these two facts in mind, investors can take their pick of the few, best startups. They don’t need to take risks on startups with an idea but no product, or a product but no customers, or customers but no growth.

Based on this type of a funding environment, you can create your own strategy for raising money. Going out with a great idea—but without execution or business results—is folly. Entrepreneurs need to buckle down and get that “initial traction” (as the VCs call it) themselves.

But don’t wait until all of your ducks are in a row before you hit the road. As entrepreneur Mark Suster wrote in “Invest in Lines, not Dots,” an investment is a two-way relationship, and relationships aren’t formed with a single meeting, or rushing through a quick process of letters of intent and due diligence.

Investors want to get to know you and the business. They want to see you struggle and overcome. They understand there are always new challenges, so they’re interested in how you acknowledge and tackle those challenges.

Given that, the best time to talk to investors is before you need them. You should be upfront about where the business currently is, but genuinely interested in keeping in touch so you can update them quarterly on how things are going, and even how they might be able to help you along the way.

So, when is that sweet spot? A rule of thumb for a company to claim it has found early traction is revenue of $10,000 per month per founder. This is the point in a bootstrapped company where the founders have quit their day jobs and can devote all of their time and energy to the startup, which is the real fuel the company will need to thrive. It’s also just enough proof that customers exist and will pay the price asked for the product as it is today, and suggests this will continue into the near future.

At this point, very early-stage seed investors will also be ready to invest. Some modern “seed funds” are, too, but those who are really acting like the Series A of a decade ago will want to see revenue more like $40,000 per month to $100,000 per month.

However, $10,000 per month per founder is still the right time to make “first contact,” to start the relationship that culminates in your reaching milestones and investors’ seeing that you can accomplish what you say you can accomplish.

Aside from revenue, you should also have a specific short-term plan for the money. For example, you could say, “Our $1,000-per-month AdWords budget has been an extremely efficient channel for us. There’s enough inventory available to increase that to $6,000 per month. So we want to put $70,000 into that over the next 12 months. We also want to run experiments with other online services, and then double-down on whichever of those pans out, which amounts to another $70,000.”

This same pattern can be used with product development, sales, customer service, finance, and so on. Although no one can see the future, especially with early-stage companies, the key to piquing the interest of an investor is having a specific plan of how the new investment will propel the company forward. The investor needs to believe that “the only thing standing between this company and success is a cash injection.”

Finally, even when they’re not investing, great investors want to help. Great entrepreneurs interview their investors as much as the investors interview them. Forging an early relationship is a way to suss out both sides of that equation.

Once you have your traction, you already know who you want to invest, and they already know the feeling is mutual.

That’s how the best relationships are formed.

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