Updated Feb 25th, 2024

I recently had a conversation with a friend of mine who works at a later stage VC firm, and I was asking him what sort of operating metrics he’s seeing at companies that are getting their Series A rounds done. About 6 months ago he mentioned that you really can’t raise an A unless you have $1M in ARR. Now he’s saying it’s actually a bit higher, maybe $2M. Another friend of mine was telling me he had been hanging around the VC hoop for awhile but only was able to get real conversations going once he was at $250K about a year ago in the depths of the venture founding trough.

It got me thinking about what metrics actually unlock a round, and if they exist at all. In the public markets, a deeply unprofitable but rapidly growing SaaS company is going to be valued quite differently than a CPG company of the same financial profile. This is because we know that the economic models for both of these companies to reach scale ultimately look very different from each other. If a company is a cash generating machine at maturity, the trajectory of a SaaS company to reach that mature state will involve operating unprofitably most likely for the first 7-10 years, but this is not the case for the CPG business.

Anyway, if we value public companies of the same financial profile differently, we probably do so for companies as early as the seed stage as well. My experience tells me as much. By the time we raised our Series A ($20m), Bowery still operated a tiny farm selling into two Whole Foods stores. Sure, it was a different time (2017), but it was also a completely different business with different expectations of what the billion dollar trajectory looked like.

One of the pieces of advice that resonated with me most from my 4 years of working with Irving (Bowery’s co-founder and CEO) was that fundraising was first and foremost an exercise in milestone management. In other words, there are no rules about what gets a round done or not, but rather it is about the expectations that you set with the market, balanced with the expectations that the market in turn sets for a company that looks like yours, and then your ability to outperform those expectations. Of course, it’s not that simple, and there is a spectrum for all three of those factors.

I’d like to expand on the notion of “milestone management,” because I don’t think it’s truly complete. You can create a narrative around a milestone, but if those milestones don’t align with similar companies in the market of a similar size, it’s a difficult obstacle to overcome. My addendum to milestone management is “machine management,” or the ability to convey that your business is a representation of the future large scale cash generating machine that everyone wants it to become.

So, back to my original question of what metrics unlock a Series A. Once you raise a Series A using venture capital, the expectations set upon you from investors change. When you raised your seed, you were convincing investors that there was a multi-billion dollar opportunity out there, that you had a unique insight to attack that opportunity, and that you have the right team to go after it. You also had a few proof points around ARR and growth most likely, as well as others about hiring top tier talent, but those things aren’t proof that the business is going to work, but more so leading indicators that you as a founder have the capacity to push this business forward. Ideally you have a sense for product market fit, or you have leading indicators of it but not full proof. You are aiming to achieve PMF or more clearly validate your PMF.

Once you raise an A, this changes. The expectation from your investors is now that you are aiming to build a billion dollar business. That’s the outcome that makes the math work for them. It is at this stage and beyond an investor’s goals might diverge with a founder’s incentive, but there are ways to bring that bit more into alignment, such as allowing founders to take a bit off the table.

So if we work backwards from here to try to understand what the right Series A metrics are, we have to ask what metrics indicate that a company is on the path to becoming a billion dollar outcome? Certainly just reaching $1 or $2M in ARR is not it in a vacuum. Back to machine management, I think the right metrics are those that prove that you have built a repeatable process that looks like it has the potential to reach that $Bn scale. For example, if you as a founder $1M ARR by you yourself selling 1 $700K contract and a few other $50 and $100K contracts, that’s great but that’s not really a machine. It doesn’t feel very repeatable or indicative of what the repeatable process will be going forward.

Way back in my banking days, we sold Red Owl, a risk management software company, to Forecpoint, another cybersecurity firm. Forcepoint was a soft landing for the company, as Red Owl struggled to raise its next round of financing. There are always a myriad of reasons for this, but one of obstacles we faced that alway stuck with me was that it was difficult to prove to that the sales motion at the company was institutionalized and repeatable. The company had a few huge contracts at various government agencies due to the CEO’s personal relationships, and then a handful much smaller but equally unpredictable contracts with financial firms through the few AEs at the company. Ultimately the company was acquired for the contracts it did have, but not much else.