Last year I wrote an article about how the bar for Seed Rounds had gone up dramatically over the years. Well, not surprisingly Seed wasn’t alone, the bar for A Rounds has also gone up a lot and like the title says, in 2018 the average startup had an ARR of $1.8M going into their A Round according to a new study from Tomasz Tonguz from Redpoint Ventures.
I can still remember back to 2014 when we were first raising from VCs and the generally accepted MRR for an A Round was $50k. I can remember having that ingrained in my head, “we need to get to $50k MRR to raise our A.”
A couple of years later I can remember talking with an investor who said, “the companies we’re seeing get A Rounds now have an MRR of $80k or higher.” Well, while that sounded like a high number at the time, that number is now almost double, sitting at $150k MRR and growing, fast.
Before you panic, here’s the silver lining.
Almost a quarter of the companies in Tomasz’s study raised their A Round with an ARR of $0. Which goes to show you that while $150k of MRR is likely going to solidify your A Round, there are plenty of companies out there with much lower revenue numbers that are landing A Rounds.
That being said, it’s clear the bar has gone up quite a bit over the years, and Tomasz shares his thoughts about why this has happened:
There are two reasons for this increase. First, the science of building SaaS companies is better understood today than in 2014. Consequently, more companies are able to reach $1M in ARR than in the past because they can be more efficient with their capital. Second, round sizes at the seed and the A have increased. More money enables startups to achieve greater milestones before raising the next round. Both of these factor work to increase the ARR at Series A.(Source – tomtunguz.com)
While I do agree a bit with his first point, I also disagree with it. I’m not sure that having the science of SaaS better understood necessarily makes it easier for founders to start and grow SaaS businesses. In some ways I actually think it’s gotten harder because the reason why the science is more well-known is because there are more SaaS companies than ever before so a lot more competition. This, IMO, also makes it a lot harder than in 2014 when you likely had a lot less companies doing what you’re doing and competing for the same contracts.
As for his second point, I agree there – round sizes have gotten a lot bigger and there are a lot more companies raising “Seed Rounds” when they already have $100k in MRR which makes getting to $150k a lot easier than starting at zero.
All this being said, no matter how you slice it, the reality is that Seed Stage founders do need to hit a much higher revenue and growth benchmark today than they did just a few years ago. I don’t see this trend slowing down either so it wouldn’t be ridiculous see the average MRR at the A Round to go above $200k this year.
What does this mean for Seed stage founders?
I go back to Tomasz’s second point – the bar is higher because Seed rounds are getting bigger. This means that raising a $500k or even $1M Seed likely won’t get you where you need to go. Let’s be honest – do you really think you could scale up to $150K MRR off of $1M? Maybe you can but I certainly don’t know how to do that!
This makes me think that if you’re a first time founder raising a Seed round for the first time in 2019, I’d say raise as big of a round as you can. You might have to give away more of the company that you expected, but given how high the bar for an A Round has become, and how likely it is to keep going up, you’re going to need more money to get there, period.
Of course, that’s just my two cents. As I’ve said many times here, I’m not an expert, I’m not a serial Entrepreneur with a bunch of exits under my belt, so what do I know? I want to hear from you, comment and let your voice be heard!