The first component of ‘working’ is a minimum scale. The key here is that there have been enough sales that investors can be confident they’re looking at a repeatable pattern and not just a series of one-offs. What constitutes minimum scale varies from company to company and the size of the Series A, but as a guide £5m run rate for an ecommerce business with 40%+ gross margins or a marketplace with a 10%+ commission will have enough scale to interest investors writing typical £5m Series A cheques. 

The second component is growth. Revenue is a primary driver of value for startups and investors need to believe that sales will grow quickly in the years immediately after investment, particularly the first year. If a business is growing fast investors can look at the behaviours that are working now and evaluate whether they will continue to work in the future. Conversely, if a business isn’t growing fast then investors need to believe that something is going to change which is a much harder ask.

 

If a startup is going to get to significant scale in a relatively short time period then growth has to be rapid, and because growth is much easier off a small base the growth in the early years needs to be extremely fast. Hence most Series A investors are looking for monthly growth rates in the 20-30% range.

The third and final component is scalable economics. What investors are looking for here is confidence that with their investment rapid and efficient growth can continue. That requires an understanding of customer lifetime value calculations - i.e. how spend on marketing activities translates into revenue and that the profits generated from customers are greater than the cost of acquiring them - or will be in the future. Best practice is for startups to have a complex model describing how customers are driven to the website, how they convert to customers, how much they spend (now and in the future) and how much money the company makes from that spend.

 

Companies with a strong social media following, good word of mouth, inherent virality or high repeat customer rates often have strong life time value calculations which makes them very attractive investment prospects.

 

Investors of course look at the whole picture of a business, or which revenues are only one part, albeit an important part. Factors like team strength and market size are also hugely important and if a startup has a strong story on these dimensions then investors will often be more relaxed when it comes to revenue benchmarks, and vice versa.