On a ‘venture-investable’ timeline, 87% of startups fail to reach $1M ARR. The seven-figure threshold is a big deal, and yet I’ve seen plenty of promising companies hit that milestone and immediately begin to sh*t the bed. How can that happen to teams who have already achieved such rarified success, just when all cylinders seem to be firing?
Easy, they view funding as the key to “scale”.
More headcount, more GTM spend, more infrastructure, all unlocked by more capital. The assumption is that because the business has reached a key financial milestone, they’ve got things figured out. That’s a very expensive assumption, and in the vast majority of cases, completely untrue.
Before you start spending money to accelerate, you need to understand what’s actually performing, what’s repeatable, and where the business has enough head-room to truly stimulate growth.
What $1M ARR Tells You About Your Business
Assuming you aren’t selling seven figure deals, $1M in ARR can prove the presence of important fundamentals – or at least serve as a strong indicator of such. It proves you have something valuable that customers are willing to pay for, and you’re getting better at selling it. What it doesn’t automatically verify is that the channels you used to access those customers are repeatable, or that the individuals selling aren’t singularly unique (founder-led selling), or that your operations are ready to support many times current revenues. And it certainly doesn’t mean that those customers will realize value, remain intensely committed, and continue to consume additional products and services, like rabid fans.
When a founder starts thinking of going from $1M to $10/20/50M, they tend to think linearly. Those increases mean growth at multiples of the current state, so they start considering how to dump fuel on that fire. When in fact, it’s far more probable that you will need to start many more fires before you find the flames to be durable. Most fires go out if you drop too much material on them – smothered, because there wasn’t enough heat to support the ambition.
I tell founders that success confirms the inevitability of change. A nascent company can get away with a lot of things that a successful company can not. The founder might still be involved in every sales opportunity. Processes might exist largely in people’s heads. Perhaps churn isn’t even a possibility, as no one has been on the platform for longer than six months! That’s all going to change.
Founders need to recognize which parts of the company are ready for greater investment, identify new areas to test and build, and flag gaps and weaknesses that need to evolve before they can support the weight of growth.
Identify What’s Driving Revenue Growth
One of the most common narratives we hear from founders is that they ‘just need a little more capital in order to generate demand, hire talent and unlock revenue’. What they’re actually saying is that they need more time to figure things out. This approach is always inefficient, and almost always fails.
The time to experiment comes before the time for capital. Capital is a great accelerator, but an incredibly poor investigator. Many businesses achieve directional success, and yet they don’t know any more about how to acquire customers at scale than they did at their first sale. I also want to stress that this isn’t always a bad thing. A lot of successful businesses were created on the back of small (or even singular) sales teams. Buyers found the company, they believed in the solution, bought it, and revenues grew. These are often classified as “lifestyle businesses” labeled with a certain amount of negative connotation. In my opinion, there’s nothing negative about building and running a profitable business. The key differentiator between a lifestyle business and a venture-backed business is that the former doesn’t need to find methods to artificially stimulate demand – whereas the latter is required to. Founders who acknowledge this, and set out from day one focused on discovering and building that flywheel, are the founders who win.
It’s essential to understand how customers become aware of a solution, why those customers buy, and at the same time determine if you’re able to influence that buying process (i.e. the decision is made on a timeline you created/accelerated). This insight allows startups to identify truly repeatable GTM motions, where additional investment will increase yield.
So, What’s the Fix?
When it comes to the solution, more important than the ‘what’ is the ‘when’. Simply due to our role as VCs, money (and possibility of suddenly having some), tends to frame the conversations we have with founders on this topic. In truth, be it a venture-backed org, bootstrapped business, or even a far more mature company – my advice on avoiding this pitfall always looks the same. Experiment, find proof, build the systems to support the opportunity, and then accelerate. There’s no way to skip the line – at least not in today’s, dare I say, level-headed environment.
It sounds strange to accuse the tech sector of prudence, but that’s another of the unpredictable ripples created by the AI explosion. Sure, the austerity wave born of AI-enabled efficiency is likely underpinned by greed, but that doesn’t make it wrong. It does however make it very confusing to founders still operating off a playbook that was lauded a few short years ago and now has become damning. Moving fast, breaking things and blowing a heck of a lot of money doing it was the answer to all problems – until it wasn’t.
Today’s venture-backed startups are asked to operate more like their bootstrapped comrades – at least when it comes to proving return on spend. I love this, not because I’ve bootstrapped every business I’ve ever created, but because it makes sense.
The bottom line is this, revenue milestones don’t represent a victory. Instead, the learnings garnered along the way to that gate define the real triumph, as it’s those learnings that tell a founder how the next milestone will be achieved. If that knowledge, infrastructure, and processes aren’t there, the achievement is hollow.
There’s no universal playbook for catapulting from $1M to $10/20/50M, and beyond. However, the founders with an outsized chance are those who know where their business’ strengths already lie, how their systems will need to scale to support growth, and exactly where spending that next dollar will make the most difference.
