The Mythical Million Dollar Run Rate – Hacker Noon

People obsess about college rankings, baseball stats, and other forms of numerology out of a natural human desire to simplify and bring order to their world. Seed stage startups often do this by fixating on a single revenue number — a million-dollar run rate.

As far as round numbers go, a million dollars of annual revenue is a great sign of progress. Once upon a time, it really was a marker that made a meaningful difference in raising a Series A, but the imaginary milestone of $83K in MRR isn’t the ticket to a Series A that it was five years ago.

Over the last half-decade, there’s been substantial inflation in round sizes, to the point where a Series A has the dimensions, and prerequisites, of what would have been closer to a Series B round 5 years ago. When evaluating decks, Series A investors won’t treat companies with $900K and $1.1M in annual revenue differently. Today, the benchmarks to land a series A often include several million dollars of revenue, accelerating at an impressive velocity, and combined with well-rounded leadership teams, and impressive customer rosters. The bar has meaningfully moved from five years ago.

Still, many founders fetishize it this one number. They insist it’s what’s keeping VCs from taking them seriously. They’ll increase their burn and spend inappropriately to get to it. And most of the time, this is a waste of focus and resources. The better advice is to grow revenue as quickly as you can, sustainably, and focus most of your attention on helping investors answer one critical question.

Why is this startup going to make the leap?

Venture capital is a velocity business and every good VC’s portfolio is going to have a few companies that have taken off like a rocket ship. Investors want to know why you’ll be like that company, and not one of a dozen slow-growing zombie startups from whose boards they can’t escape.

Casper earned $100M its 2nd year in business. Coinbase got to a billion dollars in revenue in under five years. These are outliers, to be sure, and most VC’s portfolios are filled with more modest growth stories, but VC is an outliers business and investors want to believe they have a chance to invest in one. If your current run rate doesn’t put you in that category, you must answer the question of how you will become one.

VCs have an idea of what the outlier trajectory of a successful startup should look like, and the steps necessary to achieve it. It’s the founder’s job to connect the dots for the investor and present a credible picture of how they’re making it happen. The challenge is, the longer it takes a company to accelerate, the harder it is to believe the company can become a unicorn. You want your startup to be perceived as a “potential fund returner,” not a “solid business.”

When a VC looks at your deck and sees that you’ve spent $5M in various forms of seed funding over the space of four years to get to a million dollar run rate, it gets harder to believe this startup is going to make “the leap” in year four. It’s the founder’s job to tell a credible story about the product launch, marketing channel, or new customer that will triple (or more) your revenue in 18 months.

To be clear, the point isn’t that you should mount a PR campaign to try to build buzz for an otherwise struggling startup or start telling stories that won’t come true. Instead, the point is to focus on the substantive changes required to massively accelerate organic revenue growth. Your job is to provide evidence of sustainable and accelerating growth, not to chase expensive and temporary “hacks” to add a small amount of revenue in hopes of meeting a mythical benchmark.

More importantly, if your company isn’t on this path and starting to connect the dots to the hope curve, not only will fundraising be somewhat painful, but artificially trying to put your company on this path can be catastrophic.

Put simply, don’t spend your last $1M of funding on ads to grow revenue run rate from $600K to $1.1M. Use it to figure out how to demonstrate you’ll be able to go from $1M to $5M. Everything else is a distraction.

As David Frankel has explored previously, there are many reasons that revenue alone won’t guarantee funding. A million dollars in revenue won’t get you funded if you’ve got a direct competitor that was founded at the same time and has managed to get to a $10M run rate in the same time. Or if what you’re building a business that doesn’t have a network effect, data asset, or another strategic asset.

Remember, you can always stop playing the game

Instead of obsessing about an arbitrary notion of what some investor might care about and spending your finite resources in a low-probability bid to meet that goal, consider how you might use those remaining seed dollars to get to breakeven and change the game. As you learn more about the levers you can pull to achieve sustainable growth, the more confidence you’ll have. You’ll also quickly learn the easiest way to get venture capital is not to need it. There are dozens of companies — Dyn, Lynda, Wayfair, SimpliSafe, and dozens more — who used very little venture capital but became extraordinary companies.

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