Annual Run Rate and Size of Funding Round

While it’s rare that Yik Yak was able to raise a large Series A round just seven months after launching (see WSJ article), there is a strong correlation between the startup’s revenue run rate and raising money. Too often startups, especially B2B Software-as-a-Service (SaaS) startups, go out looking to raise a large sum of money and don’t have the requisite revenue run rate, or other metrics, to warrant the target amount of capital and corresponding valuation (entrepreneurs typically sell 20-35% of the company during each round of financing, so to raise a $10 million round, the company must have a huge valuation).

Here’s a ballpark for revenue run rate and size of funding round:

• Annual run rate less than $20,000, raise a friends and family round of less than $250,000
• Annual run rate between $20,000 and $100,000, raise a seed round between $250,000 and $750,000
• Annual run rate between $100,000 and $1,000,000, raise a large seed round between $750,000 and $2,000,000
• Annual run rate between $1,000,000 and $3,000,000, raise a Series A round between $2,000,000 and $7,000,000

Now, the goal is to set expectations, based on recurring revenue, of what a normal-sized round might be for a competitive deal. Of course, investors can offer as much, or as little (none!), as they want. It doesn’t hurt to seek a larger round than what the annual run rate and corresponding valuation might dictate, but it’s important to be in the reasonable range to show you’ve done your homework and understand how the process works.

What else? What are some more thoughts on annual run rate and size of funding round?