The Founder-Led Sales Process that Drove $600K in ARR

May 7, 2024

Founding a company is challenging enough without also heading your sales process. But Kelvin Johnson, the CEO and co-founder of Brevity, believes that leading sales is an opportunity for founders to get to know their customers. He’s developed a five-step sales process that tailors to a prospect’s pain points and adapts to his customer’s needs, while also allowing him to learn his Ideal Customer Profile (ICP) and build trust.

In a recent webinar for Right Side Capital Managment’s portfolio companies, Kelvin sat down with RSCM’s “Sales Doctor” Paul Swiencicki to share how he’s used his founder-led sales process to drive $600K in annual recurring revenue (ARR) for Brevity’s core product, an AI-powered sales role playing tool.

Below, we outline Kelvin’s sales process and highlight some of his key insights.

Step One: The Qualification Call

Kelvin uses a qualification call to kick off his relationship with a prospect to determine if his product will be a good fit for them. He makes sure the call takes place before any additional time is spent on the sales process. “We start off these conversations by asking, ‘What piqued your interest to even take this call?’ and ‘What will a successful outcome look like at the end of our 30 minute conversation?’ So at least we have an anchor point as to what’s important to them,” says Kelvin. “We may have our own agenda, but I really want to figure out what is important to this prospect. And I want to make sure we maximize our time.”

Qualifying leads is a critical part of sales success. A founder’s time is best spent on prospects where their product can make a big impact. “At first, we weren’t doing a great job of qualifying our leads. But over time, we ended up discovering that our best ICP is somebody that’s at the sales manager level or above, who oversees at minimum 10 sales reps. That’s where it starts to make sense for us,” says Kelvin. “You’ve got to qualify hard to close easy.”

Step Two: The Custom Test Drive Demo

Kelvin has learned that a demo is much more effective when he caters to a prospect’s specific pain points. He schedules a “call before the call” in advance of a demo to gather information. “In the call before the call, we’re trying to figure out where a prospect is experiencing the greatest friction, what initiatives they have in place to alleviate that friction, and what have been the results of those initiatives,” says Kelvin. “We’re also trying to get into the weeds of what key success metrics matter the most to them, a.k.a., ‘How do you plan to justify this investment internally?’”

Once he knows what’s important to his prospect, he can give them a customized demo. Demonstrating he paid attention is also a great way to build trust and strengthen his relationship with the prospect. “You have to shut up, listen, and then here’s the most important part: As soon as you hear what the customer says, that’s the only thing you demo,” says Paul. “What I find is that everyone just does a spray and pray demo. It’s all just one size fits all. That’s not what prospects want. The first thing you have to demo is what they said their problem is. Otherwise, they’re not going to listen.”

Step Three: The Business Justification Review

After the demo, Kelvin sends the stakeholders a document that captures everything he’s learned about them thus far. The document outlines their problem, what they’ve already tried, the outcomes and results of those past solutions, what they stand to gain by using Kelvin’s product and, most importantly, what they stand to lose if they do nothing. “One of the most important sections in the document is about the cost of inaction – the lost revenue calculator,” says Kelvin. “The biggest thing we’re all competing with is doing nothing.”

He then schedules a call to go over the document with the stakeholders, so he can put all of the relevant information in front of the prospect in one tidy package. “This makes our champions look so good when they present to their CFO along with a supporting Excel sheet that shows them the cost of doing nothing, of not buying our product. That shows them why they need to start now,” says Kelvin.

Step Four: The Kick-Off Call

Kelvin is thinking about retention before he’s even closed the deal, which ultimately leads to higher ARR. Research has shown that retaining customers is cheaper than acquiring new ones and that improving retention by just 5% can drive profits up over 25%.

Kelvin sends the prospect a plan for implementation that sets expectations and shows clear milestones and goals. “We understand how overwhelming new software can be,” says Kelvin. “I’m trying to break it down into very digestible pieces.” He asks his new customer two questions: “Before the end of our renewal process, what are you going to brag to your board about?” and “What is one high-impact scenario where we can deliver first value?” Kelvin and his team can then have a kickoff call that caters to these primary objectives.

Step Five: The First Value Check-In

About one month after closing the deal, Kelvin schedules a call with his new customer to ensure they’ve hit their initial goal. “Our average customer is getting to first value within 17 days. Not because they’re focusing on uploading their entire sales playbook into our roleplaying software. No, no, no. We’re focusing on one high impact, high stakes, high frequency scenario,” says Kelvin.

From there, Kelvin can work with the customer to expand Brevity’s usage and ensure the customer is getting what they need. “I tell them, ‘It’s our job to make this simplified for you and your team,’” says Kelvin. “Everybody learns how to maximize the utility of the software within the first month. And then once we’ve nailed that, then we get to show ongoing value.”

A Repeatable Process for Building Revenue and Trust

Kelvin’s five-step sales process is a testament to the power of personalized engagement. It emphasizes active listening, customized demonstrations, and transparent communication that not only fosters trust but also ensures alignment between Brevity’s solution and the customer’s needs. By implementing Kelvin’s strategies, you can not only increase your chances of closing deals but also establish credibility, laying a solid foundation for a long-term, successful partnership.

Want to get more expert advice for your startup? Apply for funding from Right Side Capital to gain access to take part in our community of 1800+ founders and gain access to a host of free services including go-to-market, sales, marketing and fundraising advisory.

About Right Side Capital

Right Side Capital is one of the most active VC firms investing in the Pre-VC stage, partnering with 100+ capital efficient tech companies in the USA & Canada every year at an average round size of <$500K.

As a team of former founders and operators, we know that founders tackle problems that are equal parts challenging and inspiring. Building on our 12 years of experience with 1800+ portfolio companies, we’re changing how early stage startups receive funding and support.

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Despite being part of the U.S. Tax Code since 1993, QSBS was unused for decades—overshadowed by shifts in capital gains rates and overlooked by even seasoned investors. But today, thanks to key legislative changes, QSBS is making waves as a game-changer for venture funds, angel investors, and entrepreneurs alike.

In this post, we’ll explore the history and mechanics of QSBS, how it can transform your tax implications, and what you need to know to take advantage of it. If you’re investing in early-stage startups, this might just be the most important tax benefit you’re not fully using—yet.

QSBS first appeared in 1993, but was largely ignored

In 1993, Congress set out to incentivize investment into U.S. small businesses. As a result, Section 1202 of the IRS Tax Code was created as part of the Revenue Reconciliation Act of 1993. The goal was to give tax breaks to investors who purchased Qualified Small Business Stock (QSBS) and held it for more than five years. Initially, the tax break offered a blended tax rate of 14% on the first $10M of qualifying gains, or gains equal to 10 times the investor’s cost basis – whichever was higher. This was achieved by exempting 50% of the gains from taxes and taxing the remaining gains at a special rate of 28%.

At the time of Section 1202’s introduction, the maximum tax rate for long-term capital gains was 28%, making the effective 14% rate on QSBS gains highly attractive. However, very shortly afterwards, Congress reduced the maximum long-term capital gain tax rate to 20%, diminishing the relative impact of the QSBS benefit. By 2003, when the maximum long-term capital gains rate was further reduced to 15%, Section 1202 became virtually irrelevant. Saving 1% was not compelling enough to justify the extra complexity and tracking required.

The 2008 financial crisis sparked a QSBS revolution

The U.S. and global economies were plunged into a deep recession in late 2008 and 2009. In response, Congress incrementally expanded the QSBS tax break over the following years. Initially, these increases were temporary, lasting for short periods and sometimes applied retroactively. It wasn’t until 2015 that QSBS, as we know it today, became a permanent fixture of the U.S. Tax Code.

Key legislative changes included:

The American Recovery and Reinvestment Act of 2009: This act temporarily increased the tax-free exclusion from 50% to 75% for stock acquired after February 17, 2009.
The Small Business Jobs Act of 2010: It temporarily raised the tax-free exclusion to 100% for stock acquired after September 27, 2010, although only for a short period. This act also excluded QSBS gains from Alternative Minimum Tax (AMT) calculations.
The American Taxpayer Relief Act of 2012: This act retroactively reinstated the 100% tax-free exclusion and extended it forward for stock acquired through January 1, 2014.
The Protecting Americans from Tax Hikes (PATH) Act of 2015: This legislation permanently codified QSBS benefits, making qualifying gains 100% tax-free federally, exempt from AMT calculations, and free from the 3.8% Medicare tax. This was the true game-changer!

QSBS is now one of the best tax breaks in U.S. history

Today, QSBS stands out as one of the most impactful tax incentives in the history of the U.S. Tax Code. However, it wasn’t until the late 2010s and early 2020s that investors began to fully recognize the economic advantages of QSBS tax gains.

Here is the current tax treatment for qualifying QSBS gains:

Tax-Free Federally: Gains are entirely excluded from federal income taxes.
Exempt from Medicare Tax: The 3.8% Medicare tax does not apply.
No Alternative Minimum Tax (AMT) Impact: QSBS gains are excluded from AMT calculations.
State Tax Benefits: Gains are tax-free in 45 out of 50 states, with exceptions in Alabama, California, Mississippi, New Jersey, and Pennsylvania.

This combination of tax benefits makes QSBS an unparalleled opportunity for investors seeking to maximize their after-tax returns.

Holding Period Requirement

To be eligible for tax-free gains, Section 1202 requires that a taxpayer must hold QSBS stock for at least five years.

Limitations on QSBS gains

Section 1202 limits the amount of tax-free gain from any individual QSBS sale to the greater of $10M or 10 times the investor’s basis in the stock. Notably, this limitation applies on a per-company basis, not per taxpayer. As a result, an investor can claim up to $10M in tax-free gains for each eligible QSBS company they invest in, with no annual or lifetime cap on the total benefit.

What makes a company qualify for QSBS?

To qualify as a Qualified Small Business (QSB), a company must meet several criteria. While we won’t cover all the details here, the primary high-level requirements pertain to:

Corporate structure: The company must be a U.S. C-corporation.
Business activity: The company must actively conduct a “qualified trade or business.” (See definition below.)
Asset limitation: The company must have less than $50M in aggregate gross assets immediately after the funding round in which the stock is purchased, as well as at all times prior.

What is a “qualified trade or business”?
The IRS defines it by exclusion, specifying what does not qualify. The following types of businesses are excluded:

Businesses providing services in fields such as health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage, where the principal asset is the reputation or skill of one or more employees.
Banking, insurance, financing, leasing, investing, or similar businesses.
Farming businesses, including those involved in raising or harvesting trees.
Businesses engaged in the production or extraction of resources for which deductions under Section 613 or 613A apply.
Businesses operating hotels, motels, restaurants, or similar establishments.

Almost all other types of businesses qualify, meaning that the majority of U.S.-based tech startups structured as C-corporations (which is most of them) meet the criteria for Qualified Small Business status during the early years of their operations.

Can you get the QSBS tax break by investing in VC funds?

Yes. The QSBS tax benefit extends to partnerships or LLCs treated as passthrough entities for tax purposes. This means that investors in most early-stage VC funds are eligible for tax-free QSBS gains, provided the VC firm properly tracks these gains and reflects them as QSBS gains on the K-1 tax forms issued to investors each year.

In fact, a VC fund can generate well over $10M in QSBS gains from a single investment, and 100% of that gain can still pass through to its investors tax-free. This is because each individual investor in the fund has their own $10M QSBS limit per investment (as illustrated in Example 3 below).

QSBS tax benefit examples

Example 1:

An investor purchases QSBS in a qualifying company for $200k. After holding the stock for more than five years, they sell it for $5.4M, realizing a $4.4M gain. Under Section 1202 of the U.S. Tax Code, the entire $4.4M gain is tax-free federally. Additionally, the $4.4M gain is not subject to state tax in 45 of 50 states.

Example 2:

An investor purchases QSBS in a qualifying company for $1M. After holding the stock for more than five years, they sell the stock for $25M, realizing a $24M gain. In this instance, the investor exceeds the maximum $10M QSBS tax benefit. As a result, $10M of the gain is tax-free, while the remaining $14M gain is subject to long-term capital gains taxes.

Example 3:

An investor commits capital to a VC fund, which invests $1M in QSBS stock. More than five years later, the fund sells the stock for $30M, generating a $29M gain. How much of this $29M gain will investors receive tax-free? Surprisingly, it’s likely all $29M.

Here’s why: Each individual investor in the VC fund has their own $10M tax-free limit per investment. For example, if a single investor holds a 20% stake in the fund, the IRS treats them as having invested $200k in the company (20% of $1M) and as receiving $6M in liquidity (20% of $30M). This results in a $5.8M gain for that investor—well below the $10M cap—making the entire gain tax-free under QSBS.

But wait, there’s more: Investors can offset QSBS losses with Section 1244

Section 1244 is another lesser-known part of the U.S. Tax Code relevant to QSBS. It provides a unique benefit: If your investment is part of the first $1M invested in a QSBS company and the investment results in a loss, that loss can be deducted as an ordinary loss rather than a capital loss. In practical terms, this means the loss can offset ordinary income, providing a significant tax advantage.

Losses under Section 1244 are capped at $50,000 per year for individuals and $100,000 per year for married couples filing jointly.

Section 1244 has limited relevance in the traditional VC landscape since venture capital firms are rarely involved in the initial $1M invested in a company. Even Pre-Seed stage rounds typically exceed this threshold. However, individual angel investors and VC firms that focus on smaller funding rounds (such as ours) can benefit from this additional QSBS tax advantage.

How RSCM’s strategy benefits from QSBS

Although we didn’t initially design our strategy to take advantage of QSBS when we started our firm in 2012, it turns out that our focus aligns perfectly with the type of small funding rounds the government intended to incentivize. As a result, RSCM funds and investors have benefited greatly from the tax advantages provided under Sections 1202 and 1244 of the U.S. Tax Code. On average, we estimate that more than 80% of the gains from our funds will qualify as QSBS gains, and in some cases will exceed 90%. For example, over 90% of our Fund 1 distributions have been QSBS-eligible.

When combined with the tax benefits from Section 1244 losses, the federal tax rate for most of our funds is expected to fall within the low-to-mid single digits.

QSBS: Encouraging innovation and benefitting investors

The U.S. government introduced the QSBS tax break to stimulate investment in U.S. startups and small businesses, recognizing the vital role these companies play in innovation, job creation and overall economic growth. By reducing the tax burden on successful investments, QSBS encourages more capital to flow into early-stage companies, helping to fuel entrepreneurship and economic progress.

Although it took years for QSBS to gain traction, it is now recognized within the small business and early-stage venture investment communities as a significant advantage. QSBS has come to fulfill its intended purpose, becoming a powerful tool for investors while supporting the broader goal of a dynamic and growing economy.
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This blog post is NOT professional tax advice

This blog exists to summarize the history and benefits of the QSBS tax breaks. It should NOT be construed as a complete or exhaustive overview, nor should it be considered tax advice. There are additional criteria not mentioned in this post that can disqualify a company and its investors from receiving QSBS tax benefits. Please consult a tax professional before making any personal investment decisions.

For Founders

Minimum Viable Investor Updates

For pre-seed and seed stage startups, investor updates are a challenge. Often, founders try to make them too ornate and end up getting behind. Similarly, investors don't always have the time to fully digest a finely crafted narrative and lose track of what's happening. At RSCM, our portfolio of pre-seed and seed-stage investments is at about 2000 today, so we have lots of experience with updates. Not only do we read them all, we write a 3-7 line internal summary and each one goes into our CRM system so we have a complete history at our fingertips.In my opinion, useful investor updates have three requirements: they must get done, they must be easy to produce, and they must be easy to consume.

Anatomy of an Update

You can deliver on all three requirements by breaking updates into modules and putting the most important modules first. That way, you need only produce the modules you have time for and we need only consume the modules we have time for. Everybody wins.Here are the modules and order I recommend:

[Company Name] Investor Update for Month Ending [Last Day of Month]

Metrics
Highlights (Optional)
Asks (Optional)
Thank Yous (Optional)
Commentary (Optional)

Notice that the only required module is "Metrics". This should be easy to produce because, at any given moment, you should have a handful of Key Performance Indicators (KPIs) you track anyway. This should be easy to consume because most investors have lots of experience absorbing tabular business data. This should be easy to get done because, in our modern software-driven world, KPIs are at your fingertips. Most importantly, if they are the metrics you are actually tracking to run your business, then they will be reasonably informative to investors. Requirements satisfied!More detail on metrics in a minute, but first some quick notes on Highlights, Asks, and Thank Yous. If you opt to include these modules, do them as bullets. Easier to produce and easier to consume. But, as with PowerPoint slides, no more than 7 bullets per section! Even then, only go to 7 on rare occasions. No more than 5 most of the time. It's easy for people to get saturated and when they get saturated, they flush the entire list from their attention. If you've got more to say, put it in the Commentary.Everything after Metrics really is optional. Better to get the update out the door quickly than wait until you come up with points for every section. If you ever find yourself thinking something like, "I'll crank out the Asks later," stop! Just hit send. Then if you do think of important items later, put them in a notes file and include them in the next update. Or send out a specific Asks email.

Universal Metrics

Now for some depth on metrics. There are really two types: (1) those that are universal to all pre-seed/seed startups and (2) those that are particular to your business. Investors need both. The first type gives us a general sense of how things are going for you relative to the typical startup lifecycle. Kind of like the vital signs that all doctors want to know regardless of patient or condition. They help us triage our attention. So start with them:

Revenues: [revenues | date when you plan to start selling] (+/- ?% MoM)
Total Expenses: [expenses] (+/- ?% MoM)
Net Burn: [total revenues - total expenses] (+/- ?% MoM)
Fundraising Status: [not raising | planning to raise | raising | raised]
Fundraising Details: [how much, what structure, valuation/cap, who]
Ending Cash: [last month's Ending Cash - this month's Net Burn + this month's Amount Raised] (+/- ?% MoM)
Full Time Employees: [FTEs, including founders] (+/- # MoM)

Note 1: we strongly encourage a monthly update cycle. Anything longer means we get data that's too stale. Anything shorter, and the financial metrics don't really make sense. Though if you're part of an accelerator that encourages weekly updates, we'd love to see them. Just make sure we also get the monthly metrics!Note 2: always put the percentage or absolute month-over-month changes in parentheses next to each entry. It turns out that highlighting the deltas make updates dramatically easier for us to absorb by drawing immediate attention to the most volatile areas.A couple of quick explanations. Always have a Revenues line. If your product isn't finished or you aren't actively trying to generate revenues, just put the target date for when you do plan to start selling. Either piece of information is enormously helpful to us. Also, provide an FTE number that logically reflects the labor resources at your disposal. A full time contractor is a unit of full time labor that you can call on. Two half-time employees are also one unit. An intern may or may not be a unit or fraction of a unit depending on how much time he/she is putting in and whether the output is roughly equivalent to what a regular employee would produce. Don't exclude people based on technicalities, but don't pad your numbers either.Now, some detail about fundraising status. This topic turns out to be pretty important to existing investors. First, it lets us know that you're on top of your working capital needs. Second, some investors like to participate in future rounds and even the ones that don't are a great source of warm leads. Third, it makes us feel good to know that other people have or will be validating our previous investment. Here are a couple of example fundraising bullets:

Fundraising Status: planning to raise in 4Q2015
Fundraising Details: $750K - $1M Series Seed at a $5M-$6M pre-money from a small fund and/or local angels

Fundraising Status: raising
Fundraising Details: $300K - $500K on a convertible note at a $2.75M cap with $175K soft committed from [prominent angel name] and other local angels

Fundraising Status: raised and raising
Fundraising Details: $400K closed of a $600K convertible note at a $4M cap from [small fund name], [AngelList syndicate name], and local angels.

Custom Metrics

At any point in time, there should be a handful of top-level KPIs that you monitor to help run your particular startup. Of course, they vary across lifecycle stage, technology area, and business model. Just pick the most important 2-6 and give them to us. Feel free to change them as you pivot and mature.Here's an example for a pre-product enterprise SaaS company:

Projected Alpha Delivery Date: 11/30/2015 (+15 days)
Alpha Access Wait-list: 47 Companies (+8)

And one for an enterprise SaaS company that recently shipped private beta

Max Queries/Minute: 1,201 (+29% MoM))
Outstanding Critical Bugs: 3 (-2)
Inbound Inquiries: 481 (-17% MoM)
Qualified Prospects: 19 (+2)
Paid Pilots: 3 (New Metric!)

And finally one for a consumer Web company in full operation

Max Concurrent Users: 1,006 (+30% MoM)
Registered Users: 23,657 (+13% MoM)
Monthly Actives: 3,546 (+4.5% MoM)
Users Making Purchases: 560 (+21% MoM)
Total Purchase Value:$17,993 (+28% MoM)
CAC: $12.55 (-7% MoM)

That's it. We estimate that, if you keep your accounting system up to date and use MailChimp, producing an update with metrics and a few extra bullets should take about 15 minutes (with some practice). And you'd be heroes in our book. Well, all entrepreneurs are already heroes. So you'd be superheroes!

This post originally published on 10/15/2015 and was last updated on 11/10/24.

For Founders

#1 Mistake: Planning for Series A?

People sometimes ask us, "What's the #1 mistake startup founders make?" Based on our 2000 pre-seed portfolio companies, one of the prime candidates is: "Planning for Series A."I don't mean the way you plan for Series A. I mean the fact that you do it at all. We see a lot of pre-seed pitch decks. A decent fraction have a "Comparables" section that list the Series A raises for companies with similar models in the same industry. In these cases, Series A has become an explicit planning goal, despite the fact that these companies are at least two rounds, and probably three or four, away from that milestone. But the prevalence in pitch decks vastly understates the issue. From systematically interviewing 800+ founding teams in accelerators, it's clear that Series A expectations play a substantial role in most founders' planning.

While completely understandable, even considering Series A at the accelerator stage is usually a huge mistake. As I've written before, taking Series A at the point where it's appropriate decreases your success rate (though increases your expected value). Unsurprisingly, actually working backward from a future Series A can create all sorts of planning pathology. Yes, TechCrunch makes a big deal out of Series As. Yes, lot of cool VCs blog about Series A. Yes, VC investment leads to pretty fantastic story lines on "Silicon Valley". But these sources of information inherently screen for outliers. It's still the exception. Even among successful tech startups. Fundamentally, you're trying to engineer an extreme outcome in a highly uncertain environment. On first principles, this is problematic, as Nassim Taleb so beautifully explains the The Black Swan. But let's work through the steps.

Start with a modern Series A of roughly $10M as your goal. OK, those VCs will want evidence that you can quickly grow past the $100M valuation mark. That means you'll probably need about a $3M Series Seed 12-24 months beforehand to build the necessary R&D, sales, and customer success scaffolding, as well as prove out a huge addressable market. This in turn implies a $1M angel round coming out of an accelerator to complete the full-featured version of the product and establish a firm beachhead market over the next 12-18 months.

Now, I can tell you from reading the investor updates for 2000+ pre-seed startups that such rounds are very hard to raise... unless you're a strongly pedigreed founder, have obviously anti-gravity level technology, or have crazy traction in a hot space. We like to say rounds at this stage have a "geometric" difficulty curve. A round that is twice as large is four times as hard to raise.

Even if you manage to raise that round, the failure rate at each subsequent stage is high because you're continually striving to achieve outlier levels of growth. There's not much room for error or setbacks. It's like trying to run up a ridge that just keeps getting steeper and narrower, with a sharp drop into the abyss on either side.

So what's the alternative? We recommend you ask yourself, "What's the smallest early acquisition (but not just acqui-hire) that I'd be satisfied with?" Unless you have a significant previous exit, are already very wealthy, or have unusual risk preferences, this number is likely somewhere between a $10M and $35M acquisition where the founders still own about 1/3 to 1/2 the company. Then work backwards from that.

Now, you may be saying to yourself, "Wait a minute! If I could get acquired for $10M to $35M, I could get a Series A. It's the same thing." Not exactly. $20M is a typical Series A pre-money these days, at least from a traditional name firm. But you would also need to be able to demonstrate that you could quickly grow to be worth $100M+. And you usually get a bit of a premium on acquisitions. So it's only at the upper end of the range where a Series A would be a fit, and then only some of the time.

Importantly, acquirers mostly want to see a great business or great technology and Series A investors mostly want to see enormous growth potential, which often aren't quite the same thing.

Finally, Series A investors usually want to see extremely rapid past growth, as an indicator of rapid future growth. Acquirers care much less how much time it took you.Also, the cost of being wrong is asymmetric. Say you aim for Series A from the outset. If at any point it doesn't work out, you either fold or do a fire sale. In a fire sale, liquidation preference will kick in and founders will get zilch anyway. Conversely, say you go the smaller route and things go much better than expected. You can still "upgrade" to the Series A path. And if you go the smaller route and fail, there's some chance you'd still make a modest amount in a fire sale or acqui'hire.

So now let's work backwards from the acquisition. We'll assume that revenues, rather than technology capability, is the relevant metric because it makes the reverse induction more clear cut.

In most tech sectors, a $10M to $35M acquisition means $1M to $3M per year in margin (not gross revenues, though in some sectors, the margins are so high, it's the same thing). That's low $100Ks of margin per month.
Next, we like to think in terms of the "straightforward scaling factor". This is the multiple by which you can grow with straightforward scaling of your product development and sales machines. No major overhauls of the product, no completely new channels, and no huge breakthroughs. Basically keep doing what you're doing, but with more resources. In most segments, this factor is 3-4X for a target in the $100K/month order of magnitude. Obviously, it's not a sure thing. Bad things can still happen. It can turn out that you've made a mistake. But it's the difference between needing circumstances not to go strongly against you and needing circumstance to go strongly for you. That works out to $20K to $80K per month, depending on scaling factor and target outcome. Thus, your near-term goal becomes, "Build a business doing $20K to $80K per month in margin."
If your minimum acceptable exit is on the higher end and your scaling factor is on the lower end, you might want to break this stage into two (though your might want to ask yourself why your minimum is higher given the lower scaling factor). In most cases, the first step therefore reduces to, "Build a business doing $20K to $40K per month in margin."

This is often a very achievable goal with a very modest amount of capital. How do you go about raising a round to support achieving this goal? Well, we have a post for that.

It's worth noting that, in terms of our expected returns, it doesn't matter too much to us one way or another whether founders follow this plan. Our funds have many hundreds of companies, so we're expected value decision makers. Though there is also some argument to be made for preserving option value by having companies survive longer. But it's not a huge difference either way at our level of diversification.

However, for founders who can only do a handful of startups in their career, understanding the difference between success probability and expected value could be literally life altering. And don't forget, once you have a modest exit under your belt, you've got the pedigree! So it's much easier to command the resources and attention necessary to go big from the start on the next one.

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This blog post originally published on 12/10/2020 and was last updated on 10/14/2024.