Milestones are meaningless for fundraising
Here’s a good game to play with your VC friends: ask them what milestones they tell founders to hit before raising a Series A. Now ask them what milestones their own portfolio companies hit before raising their As. What you’ll find is that any kind of causal linkage between a particular number – say $1 million in revenue – and raising an A doesn’t exist.
At the highest level, this makes a lot of sense – investors are in the business of funding outliers, not companies that conform to some table of expectations. But at the level of figuring what the hell do to as a founder, it is extremely irritating. If there’s one thing drilled into the heads of founders by every book, blog, or tweet about startup building, it’s that metrics matter and that founders who make the metrics go up fast build big companies with lots of investors. The confusing part is that, while metrics matter, milestones…don’t.
To understand why this is, it helps to think about your business from the perspective of an investor and not as an operator.
Each time an investor meets a founder, the investor is trying to figure out the odds that the founder can build a multi billion dollar company. That’s the entire point of the industry. If the investor sees absolutely no path to that point, there won’t be a meeting. If there’s a meeting, it means the investor thinks there is at least some chance.
There’s a set of barriers between now and that outcome for every company. Metrics are only useful insofar as they demonstrate that founders have overcome those barriers at a level that exceeds expectations for their current stage.
The reason that so many people cite “$1 million in ARR” as a critical milestone is that nearly every business is at risk of failing the basic test of getting customers. Founders that demonstrate that they’ve been able to get some level of revenue provide an answer to that question. Then again, hitting the milestone isn’t necessary if, say, you’re a repeat founder with a demonstrated history of building meaningful revenue. Hitting the milestone isn’t sufficient if investors think you’re too far ahead of the market, and hitting the milestone took you 5 years with no acceleration.
So here is a different game you should play before you meet with investors. Honestly this is a useful game to play when you are thinking about what metrics are important to your business since you should look at founding a company as investing in it since that’s what you are doing.
Figure out what the biggest barriers are between where you are now and the multi-billion dollar version of your company. These answers will change as you move through the stages of your company’s life. Once you have those, you choose your metrics – what they are, how long it should take for you to achieve them, and how much you’re willing to spend to achieve them. If you do this well, you’ll have a better sense of if you’re working on something that is going well. If what you are doing is going well, you’ll find that investors notice when you speak to them – not just because it is going well but because you know what, specifically, is going well and why it matters.
So don’t make the mistake of aiming for a concrete and irrelevant milestone. Figure out what you need to do to build a huge company, and your startup will throw off data to demonstrate that you’re already on your way.