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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?

First Round has a great article up about Indispensible Growth Frameworks based on the lessons learned from Andy Johns. The idea is that once a startup reaches a certain size, they should have a dedicated person or team focused on growth (e.g. a VP of Growth). Growth, in this example, means the flow of customers into and out of a product. Basically, anything related to getting users in the product.

Here are a few notes from the article:

• Basic Growth Equation
  • Top of Funnel (traffic, conversion rates)
    x
    Magic Moment (create emotional response)
    x
    Core Product Value
    =
    Sustainable Growth
• Amazon’s Growth =
  • Vertical Expansion
    x
    Product Inventory Per Vertical
    x
    Traffic Per Product Page
    x
    Conversion to Purchase
    x
    Average Purchase Value
    x
    Repeat Purchase Behavior
• Develop rigorous experimentation methods.
• You can’t sustainably grow something that sucks.
• You don’t need or want a growth hacker to lead.
• Your growth lead needs to be a product person.

The article is focused on B2C internet entrepreneurs but the general idea remains: have a dedicated person or team focused on acquiring leads or users and continually test and optimize the funnel.

What else? What are some other thoughts on growth frameworks and growth functions in a startup?

Earlier today I was talking to an entrepreneur and the topic of planning for 2016 came up and he lamented that he hasn’t gotten around to it yet. While many mid-to-large companies are already deep into their 2016 planning, most early stage entrepreneurs I know haven’t done it yet. Well, now’s the time to get going and plan for 2016.

Here are a few recommendations for 2016 planning:

• Start with the Simplified One Page Strategic Plan and update it for Q1 2016
• Evaluate the KPIs and see if anything needs to change in the Weekly KPIs Dashboard
• Review the SaaS Metrics Dashboard and look for areas that need attention
• Ensure that everyone in the company has 3-5 SMART Goals

Personally, I always enjoy the planning process as it’s a great time to step back and think about the big picture opportunities ahead and what it’ll take to get there. It’s critical to find time to work on the business.

What else? What are some other recommendations for the annual planning process?

Sam Altman, President of Y Combinator, recently published an excellent post called the Startup Playbook. As the leader of the largest and most prominent accelerator in the world, Sam has had the opportunity to work with thousands of entrepreneurs across hundreds and startups. Naturally, patterns, both good and bad, start to emerge and it becomes obvious what entrepreneurs should do.

Here are a few notes from the Startup Playbook:

Part I: The Idea

• Your goal as a startup is to make something users love.
• To have a successful startup, you need: a great idea (including a great market), a great team, a great product, and great execution.
• One of the first things we ask YC companies is what they’re building and why.
• Another thing we ask is who desperately needs the product.
• And it’s critical you understand your users really well—you need this to evaluate an idea, build a great product, and build a great company.
• We also ask how the company will one day be a monopoly.

Part II: A Great Team

• What makes a great founder? The most important characteristics are ones like unstoppability, determination, formidability, and resourcefulness. Intelligence and passion also rank very highly.
• The best founders are unusually responsive. This is an indicator of decisiveness, focus, intensity, and the ability to get things done.
• The best case, by far, is to have a good cofounder. The next best is to be a solo founder. The worse case, by far, is to have a bad cofounder.

Part III: A Great Product

• Here is the secret to success: have a great product. This is the only thing all great companies have in common.
• To do this cycle right, you have to get very close to your users. Literally watch them use your product. Sit in their office if you can.
• You also need to break things into very small pieces, and iterate and adapt as you go.
• Some common questions we ask startups having problems: Are users using your product more than once? Are your users fanatical about your product? Would your users be truly bummed if your company went away? Are your users recommending you to other people without you asking them to do it? If you’re a B2B company, do you have at least 10 paying customers?

Part IV: Great Execution

• The only universal job description of a CEO is to make sure the company wins.
• Growth and momentum are the keys to great execution. Growth (as long as it is not “sell dollar bills for 90 cents” growth) solves all problems, and lack of growth is not solvable by anything but growth.
• The prime directive of great execution is “Never lose momentum”.
• For anything you consider doing, ask yourself “Is this the best way to optimize growth?”
• Extreme internal transparency around metrics (and financials) is a good thing to do.
• You should set aggressive but borderline achievable goals and review progress every month. Celebrate wins!
• A related trap is thinking about problems too far in the future—i.e. “How are we going to do this at massive scale?” The answer is to figure it out when you get there.
• If I had to distill my advice about how to operate down to only two words, I’d pick focus and intensity.
• A CEO has to 1) set the vision and strategy for the company, 2) evangelize the company to everyone, 3) hire and manage the team, especially in areas where you yourself have gaps 4) raise money and make sure the company does not run out of money, and 5) set the execution quality bar.
• Among your most important jobs are defining the mission and defining the values.
• Hiring is one of your most important jobs and the key to building a great company (as opposed to a great product.)
• Don’t compromise on the quality of people you hire. Everyone knows this, and yet everyone compromises on this at some point during a desperate need.
• Do not hire chronically negative people.
• 
Value aptitude over experience for almost all roles. Look for raw intelligence and a track record of getting things done. Look for people you like—you’ll be spending a lot of time together and often in tense situations.
• A quick word about competitors: competitors are a startup ghost story. First-time founders think they are what kill 99% of startups. But 99% of startups die from suicide, not murder.
• 99% of the time, you should ignore competitors. Especially ignore them when they raise a lot of money or make a lot of noise in the press.
• The secret to successfully raising money is to have a good company.

Closing Thought

• Remember that at least a thousand people have every great idea. One of them actually becomes successful. The difference comes down to execution.
• So all you need is a great idea, a great team, a great product, and great execution.

Every entrepreneur should read the Startup Playbook and learn from the Y Combinator experiences.

What else? What are some more thoughts on the Startup Playbook?

Instagram was founded by Kevin Systrom back in late 2010 and by 2012 had 15 million users and was growing fast, super fast. So much so that Sequoia lead a $50 million round at a $500 million valuation only to sell a week later to Facebook for a billion. Now, three years later, Instagram has over 400 million daily active users — more than Twitter — and continues to grow a rapid clip. For this week’s video, hear Kevin Systrom share his story about Instagram from back in 2012.

From YouTube: Kevin Rose sits down with Kevin Systrom, founder of the popular social photo sharing app, Instagram. They chat about Systrom’s growing up with computers, his time spent at Stanford, and landing an internship at a startup destined to be worth billions. This ultimately led to launching Instagram which is now 15 million users strong and one of the fastest growing social networks on the planet!

David Heinemeier Hansson, better known as DHH, is the founder of Ruby on Rails and Basecamp. Two days ago he published a great blog post titled The Day I Became a Millionaire. Basically, the gist is that many people obsess about making a ton of money and think that that’s going to make them happy. Only, ones that achieve their goal find out that happiness comes from pursuing personal passions, doing great work, and helping other people.

Here are a few quotes from the post:

• Could you imagine not having to save up a whole year to buy a Commodore 64? Or to fly away on a foreign-country vacation every year?
• Jeff Bezos had taken an interest in Basecamp, and Jason and I each sold him a minority, no-control stake of our share of the company for a few million dollars each.
• The euphoria I felt when it was finally real lasted the rest of that day. The inner smile remained super wide for at least the rest of the week.
• Expectations, not outcomes, govern the happiness of your perceived reality.
• If anything, I began to appreciate even more intently that flow and tranquility were the true sources of happiness for me all along.
• It was like I had pulled back the curtain on that millionaire’s dream and found, to my surprise, that most of the things on the other side were things I already had.
• Once you’ve taken care of the basics, there’s very little in this world for which your life is worth deferring.

For many entrepreneurs that haven’t had financial success, the destination seems more important than the journey. Once success has been achieved, it becomes clear that the journey was more valuable than the outcome. If you haven’t read it, check out DHH’s The Day I Became a Millionaire.

What else? What are some more thoughts on the idea that true happiness doesn’t come from money once basic needs are met?

With today being Thanksgiving here in the United States, it’s a great time to reflect and give thanks. As an entrepreneur, I’m continually amazed and thankful for the opportunity to do what I get to do and the people I get to work with on a daily basis.

I’m thankful for my wonderful friends and family.

I’m thankful for our team of awesome co-workers.

I’m thankful for the excitement and optimism in the Atlanta Tech Village.

I’m thankful for the rapid pace of technology.

I’m thankful for having the opportunity to create and grow new startups.

I’m thankful for living in this great country.

It’s great to be an entrepreneur and I’m incredibly thankful.

One of the biggest challenges for entrepreneurs running the customer development process (watch the explanation video) is leading the witness. What I mean is that entrepreneurs are so passionate and eager for potential customers to see the same vision they see, the entrepreneur asks leading questions that don’t allow for true understanding of both the severity of the problem as well as potential solutions.

Here are a few ideas for customer development questions:

1. How do you currently do X?
2. What do you like about it?
3. What do you dislike about it?
4. How have you tried to improve X?
5. If you could wave a magic wand and have a new solution, how would it work?
6. How much of an issue is this problem/opportunity?

Now, this is a simple starting point but the idea is to ask open-ended questions to learn from the potential customer without steering them in a specific direction. Entrepreneurs that are able to validate their ideas without leading the potential customers will have a stronger conviction that they’re headed in the right direction.

What else? What are some other customer development questions for entrepreneurs to ask while validating an idea?