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?
David Cummings on Startups 
This is a great post, David, thanks for sharing. Indeed, hitting $1mil ARR is a difficult and important milestone, especially for tech start-ups with recurring revenue models. As someone who has experienced hitting $1mil ARR, falling back below, and working hard to reach it again, I can say from experience that hitting this important milestone is also an important market validation for your technology product or service. If you have enough clients paying you recurring fees of $1mil+, it serves as a good foundation for investors and market acceleration. So, perhaps add “market validation” and “$1mil+ in reference clients” to the list.
Thanks for sharing David. When would you recommend a Consumer App company seek a Series A? Based on the metrics to raise a Series A, 50k daily users is used as a rule of thumb. Consumer apps are categorically very broad and could be anything from a utility to entertainment… Are there sure like CrunchBase or others you’ve used to look at historical companies and their valuations?