One of the most frequent questions I receive is "how much revenue do I need before I can raise funds from angel investors?" It’s also one of the most difficult to answer; there is a lot that goes into a helpful response.
Many other factors should be considered first, like answering when the right time is for you to raise outside capital. Forget what other companies have done for a second, and think only about how you want your company to unfold.
- Do you want to give up ownership early on or bootstrap as long as possible?
- Have you exhausted all non-dilutive sources like grants, non-equity-based accelerators, debt financing, revenue-based financing, etc.?
- Can you use company revenue to feed organic growth?
Take time to think through a strategy that you are comfortable with rather than copying the blueprint of another company.
For the interest of staying on topic, let’s assume you’ve decided the right path for you includes raising funds from angels. Just when will angel investors be interested in funding your company? Applying a Midwest regional lens to the question, below are three goals that I’d encourage you to reach before knocking on investor doors.
1. Get Paid Something
Most angel investors will want to see some level of market validation before they consider investing. The easiest way to prove validation is with customers paying for the use of your product or service. Not only does it indicate you can sell, but usually indicates you’ve uncovered a repeatable, scalable sales process.
This is important for early-stage investors who want their funds to help fuel growth. Having a clear understanding of how their investment can get a company from point A to point B helps de-risk the investment.
Outlining guardrails for investor preferences on company revenue levels is tough, as one size doesn’t fit all when it comes to a wide variance of industries, business models, and pricing strategies.
However, let’s assume you have a software company that sells recurring subscriptions. Ideally, you would target at least $10,000 in monthly recurring revenue (MRR) before kicking off fundraising efforts.
Angel Group Data
Looking at the most recent twenty (20) first-time investments our angel group made in tech-based companies (excludes follow-on rounds), two-thirds of the companies had an average MRR of $17,000, with a range from $9,000 to $30,000.
The other third of companies our group invested in had an average MRR of $147,000, with a range from $66,000 up to $250,000. Usually, these later-stage investments are Series A rounds or companies that had the means to bootstrap for a longer length of time.
Freemium models or deep discounts for first adopters have a place and reason for existence and can be great for driving user traction. Yet, these can be hindrances to generating revenue. Investors will want to see how you successfully move users from free to paid accounts.
A tip recently provided by our local accelerator studio program, NMotion, sums up what many early-stage investors are looking for before they are willing to provide growth capital.
All you have to do for now is prove that you can sell, and sell reliably.
Does this mean you can’t raise angel funding before reaching $10K in monthly recurring revenue? Of course not. But I think it’s helpful to understand when angels are making the bulk of their investments as you plan your approach to fundraising.
2. Demonstrate Growth
Reaching a specific revenue level is a great first step, and ideally is coupled with double-digit growth numbers. Has it taken five years or twelve months to reach most of your growth? Investors usually look for trends that indicate both the market and customer are ready for disruption, and consistent month-over-month growth is a great way to communicate this.
Hopping back to the first topic of revenue for a second — use your monthly growth rate to give confidence for expediting fundraising discussions earlier than I laid out. If you can show a realistic plan for surpassing $10K MRR in a few short months, many early-stage investors will be open to starting fundraising discussions.
3. Understand Stickiness
Depending on when you are raising from angel investors, churn may be a tough measurement to track. Maybe your early customers haven’t gone through a billing cycle if invoiced annually. Or your first adopters are on free or reduced pricing, which can alter purchase decisions compared to later customer cohorts.
At any rate, understand the churn numbers you have and be able to explain them. Better yet, use additional methods to find out if your customers plan to continue paying for your product or services. Consider NPS scores, purchase intent surveys, referrals, and testimonials to aid in the discovery process. Installing a level of confidence that customers are able and willing to pay for your product and plan to continue to do so for the foreseeable future will go a long way as you attempt to raise outside capital.
Understand Local Investors
I often hesitate to give a concrete answer when asked what the right time for approaching angel investors is. Every investment opportunity is different and dependent upon founder needs, market conditions, and investor interest. However, I think it’s helpful for entrepreneurs to understand when most angel investment activity occurs, especially with a regional perspective that relates closer-to-home trends vs. national averages.
Find a mentor or two that can give guidance along the way as it relates to the need of bringing on growth capital. An outside perspective familiar with local investor interests can aid as you build out your timing strategy.
Disclaimer: The opinions expressed do not necessarily reflect those of the Nebraska Angels organization or its members.
Photo by NMotion