Continuing with yesterday’s post on Measuring the # of Startups that Raise Money at $10M+ Valuations, there’s another startup community metric worth measuring: the number of startups that achieve $1 million in annual recurring revenue (ARR). Much like the $10M+ valuation is a great indicator of potential success, $1 million in ARR is also a great indicator of potential success. Here are a few thoughts on the $1 million in ARR milestone:
- Assuming 70-80% gross margins (revenue minus cost of goods sold), there’s enough cash flowing through the startup to maintain a team of 5-10 people indefinitely to grow the business
- With $1M in annual recurring revenue and a great growth rate, the company has enough traction to raise a small Series A round or another angel round (see Metrics to Raise a Series A)
- Ability to join a great entrepreneurial group like Entrepreneurs’ Organization (it has a $1 million minimum revenue threshold)
- Enough continuous feedback and input from customers (product usage is oxygen) to expand and improve the product indefinitely so as to build the customer base
All first-time entrepreneurs should make it a major goal to hit $1 million in annual recurring revenue. The $1 million ARR milestone represents the financial core of a sustainable business.
What else? What are some more thoughts on the $1 million in annual recurring revenue milestone?