Here’s a common conversation I have with entrepreneurs:
Entrepreneur: I want to raise a $2 million Series A.
Me: Great. How much recurring revenue do you have now?
Entrepreneur: We’re just getting started and have a few pilot projects.
Me: Cool. What’s your annual revenue run-rate?
Entrepreneur: Well, we don’t have any revenue yet.
Me: Unfortunately, the chance of you raising a Series A is slim-to-none.
Of course, investors want a great management team, market, traction, growth-rate, and, naturally, revenue. So, what’s a good target run-rate to raise a modest Series A (e.g. $2 million – $3 million)? From my experience outside Silicon Valley, I’ve found entrepreneurs usually need to have $250,000 – $500,000 in recurring revenue (annual run-rate) to raise a couple million dollars from investors.
Now, investors typically want to buy 20-35% of the company with each round of investment, so that means a $2 million investment for 25% of the company results in a pre-money valuation of $6 million and a post-money valuation of $8 million. Is a company with $500,000 in recurring revenue worth $6 million? That’s for the market to decide.
What else? What are some more thoughts on revenue run-rate to raise a Series A?