What does it mean to be venture-scale?
What first-time founders should know about attracting venture capital
A friend recently shared that first-time founders struggle to build businesses that attract venture capital. The specific issue? They are not considered “venture scale” opportunities.
What does it mean to be venture-scale?
For a startup to be considered "venture scale" and capable of raising venture capital, it must demonstrate the potential for significant growth and scalability. Here are the key aspects that define a venture-scale startup:
Market Potential: The startup should target a large market, typically measured in billions of dollars, to justify the high returns expected by venture capitalists (VCs). This ensures that the startup can grow substantially and achieve a significant market share.
Scalability: The business model should be scalable, meaning it can grow rapidly without a proportional increase in costs. This often involves leveraging technology or innovative processes to expand efficiently and effectively.
Growth Metrics: Startups must demonstrate measurable progress and growth metrics, such as user acquisition, revenue growth, and market penetration. These metrics showcase the startup's ability to scale and attract additional investment.
Team: A strong, experienced team with a clear, compelling vision for the future is crucial. VCs look for teams that can execute the business plan and adapt to challenges. Can you grow from Chief Everything Officer to Chief Executive Officer?
Investment Thesis Alignment: The startup should align with the investment thesis of the VCs, fitting within their focus areas, such as specific sectors or business models. Of course thesis and hot sectors change regularly so don’t do chasing hype.
Exit Strategy: A clear exit strategy, such as an IPO or acquisition, is often expected to provide a return on investment for the VCs.
The current revenue expectation for a company to go public (IPO) in 2025 is significantly higher than in previous years. Across the majority of sources, the consensus is:
A minimum of $500 million in revenue is now considered the baseline for attracting institutional investors and justifying a robust public debut.
Ideally, companies should have a revenue of $700 million or more, with a clear path to reaching $1 billion within 18 months, especially for a listing that expects strong institutional backing with a top investment bank as lead manager of the IPO.
Market capitalization expectations also impact this threshold. To achieve a $5–8 billion market capitalization (which is often seen as the minimum necessary to attract analyst coverage and solid public market support), companies typically require $500–$800 million in forward revenue, assuming a 10x revenue multiple.
Context and Change Over Time:
In the early 2010s, companies could go public with just $100 million–$250 million in revenue (e.g., Twilio, Etsy)
Venture capitalists invest in startups with the potential for high growth and substantial returns, typically seeking companies that can achieve valuations far exceeding their initial investment. This involves returning many multiples of their initial investment. What does success look like? It depends on the size of the fund and the stage. 200x or more is quite common based on the Power Law of returns. A partner at one famous firm on Sand Hill Road once told me we couldn't possibly invest in anything that wouldn't be worth $20 billion one day. Based on their fund size that was a reasonable expectation.
Would you like to know more about how startups can prepare for venture capital fundraising? Check out The Funding Framework: Secure Startup Funding with Confidence from Leader’s Press, now with a new audio book version from Audible.