Earlier today I was talking with a growth stage VC about some of the fast-growing startups in Atlanta. Naturally, I asked what minimum revenue number he looks for in order to qualify as a growth stage investment and he gave the expected response: $5 million. I don’t know when $5 million became the standard for growth stage startups but it’s incredibly common now. Now, the bigger question is why did these professional money managers arrive at the $5 million revenue minimum in the first place?
Here are a few thoughts on the $5 million revenue minimum for growth stage VCs:
- Market Size – If the startup got to $5 million in revenue pretty quickly, there’s a great chance that they can get to a size and scale many times that (e.g. if they can get to $5 million, they should be able to get to $50 million). Of course, the overall market opportunity needs to already be large, and/or fast growing. My personal favorite is small markets that are growing fast.
- Customer Base – Assuming it’s not a handful of six and seven figure customers, $5 million in revenue means that there’s a large number of customers (e.g. at least more than 100) representing a diversified customer base. VCs like looking at segments, cohorts, and other types of customer data to then extrapolate what could be with an accelerated trajectory.
- Team – By $5 million, it’s likely the startup has 30+ employees (if not more), meaning there will be some or all of a management team in place, a defined corporate culture, and a “feel” about the inner workings of the business. VCs look for patterns from previous investments, and it’s easier to get a feel for things when there are apparent similarities (e.g. a sales-oriented culture or a maniacal customer focus).
It goes without saying that even though $5 million is the minimum revenue amount, the startup also needs to be growing fast, super fast — a slow growth $5 million startup isn’t going to be interesting. The next time you talk to a VC, ask them what stage they like, and the minimum revenue amount for that stage. If they say growth stage, it’s likely a $5 million revenue minimum.
What else? What are some other reasons growth stage VCs make $5 million in revenue their minimum?