VCs are somewhat reluctant to provide guidelines for their investments for fear that they may scare away the next Google or Facebook. Before listing the guidelines (that I have deduced from dealing with VCs) for the first round of venture capital--the A round, let's confirm a few basic points:
- Only send information to VCs that have a demonstrated interest in your industry or technology
- Try to get a good introduction to the VC; avoid the 500 email blast
- Pick potential VCs who are geographically close and then work outward; for example, California VCs typically do not do early stage Florida companies.
- You need to demonstrate a solid understanding of your market and its potential size
Now with the assumption that you have survived the seed stage and have some customers and revenue, here are some of the key things the VCs will look for:
- Revenues of $1 million, based on a fiscal year, trailing 12 months or run rate. Even increasing monthly revenues that will total nearly $1 million for 12 months by closing may suffice. The magical $1 million in revenue demonstrates that you have real customers. ($3 million demonstrates that you can commercialize the product (the next milestone) and $10 million demonstrates that your business can scale.)
- No significant customer concentration. 1 customer companies or companies with one large customer do not demonstrate a customer base usually.
- Sticky customers without a lot of churn (or at least not more churn than industry norms)
- Accelerating revenues as opposed to lumpy sales. Every month does not have to surpass the previous month but a solid trend is important.
- Breakeven EBITDA or a near term plan to reach that level or positive EBITDA
- Capital efficiency in getting to this point. If you have invested more than about $5 million to build a company with $1 million in revenues you are not usually attractive (unless you are in biotech, pharmaceuticals, etc.) See this prior post on capital efficiency.
Every set of guidelines has its strengths and weaknesses. If startups keep these guidelines in mind as targets for their early development, they should be more attractive to VCs when they need to raise their A round.
Everyone has heard the stories of the VC that funded an idea presented on a napkin. I met a well known Silicon Valley VC who acknowledged that he had done one deal that way--in 20 years of investing. Don't plan on a long shot. Figure out how to get to $1 million in revenue and then go for your A round if you need capital.