500 Startups has a great checklist for investing in startups that includes items like capital-efficient, internet-based distribution, simple revenue model, functional prototype, small but measurable usage, and more. One area that’s vague but super important is around the small but measurable product usage or early revenue, otherwise known as traction.
In most of the country, startups need to have some level of traction to raise money unless it’s an entrepreneur that’s been successful before. Here are some thoughts on the amount of traction needed to raise angel money:
- Valuations of $1 million – $1.5 million pre-money are pretty standard when startups have $25,000 – $100,000 in annual recurring revenue
- Valuations start to move up once the startup has $250,000+ in recurring revenue
- After $1MM in recurring revenue is achieved, valuations move up significantly (e.g. $5MM – $8MM pre-money) as the venture is often getting close to a repeatable customer acquisition process and the business is viewed as less risky
Most startups I meet with are pre-revenue and in a difficult spot because angel investors want to see some traction, even if it’s modest, before investing. Entrepreneurs would do well to have a fair amount of recurring revenue to raise money on good terms.
What else? What are your thoughts on the amount of traction a startup needs to raise angel money?