This is a question that needs to be answered according to the stage of the startup.
For very early stage startups:
Gaurav Jain, Co-Founder and Managing Partner at Afore Capital, shared his thoughts on what it takes to raise a pre-seed round in 2020.
For startups with traction, looking to grow:
"As an institutional Venture Capitalist, I am always looking for a startup that could reach $100 million in revenues and that has the potential to get to $1 billion in revenues." - Scott Maxwell
By "investable business", we a referring to a growth style business that is on track to become funded by institutional venture capital investments in the typical angel / seed / A / B round structure.
While the first couple of years will typically limited revenue (due to a laser sharp focus on a small but well defined beachhead market) and will typically be cash flow negative due to all the investments needed to get the venture off the ground, there needs to be "a path to greatness" for investors to take notice.
Indeed, the bar for a "priced round" is getting higher and higher with each passing month. Jacob Mullens, a Partner at Shasta Ventures, wrote in an article dated February 2019 that startups need to meet the following conditions in order to raise a Series A round in San Francisco in 2019.
- The startup needs to have already arrived at product/market fit
- For a SaaS company, investors expect to see at least $1M in ARR (annual recurring revenue). $2-3M ARR is better. They also expect to see a growth rate of 2-3x year over year.
- West coast VCs expect the startup to have instrumented their go-to-market strategy and tried a ton of experiments to figure out which user acquisition channel is the most productive and cost effective.
- Last but not least west coast VCs want to see the startup play in a huge market that is ideally valued at $10b, growing to $100b in the next 5 years.
Now, that can seem daunting. But don't get discouraged. First, not every business is a SaaS business - and different businesses carry different metrics. For instance, the fund raising metrics for a non-profit is completely different than these types of numbers. If you are building, say, a warehouse automation business, or a clean energy business, the timeline could be a lot longer than 5 years to 100m revenue - and that's fine. You just need to make sure you work with investors who understand and appreciate the dynamics of the business you are in.
If a venture is by nature not going to grow in the prototypical hockey stick manner, it can still be a very good business, but it might be better off building this business by bootstrapping it rather than seeking external institutional funding.
Confused about pre-seed / seed / lettered rounds and so forth?
Read this 2020 article from MassChallenge about what it takes to raise money for a software business in 2020. This is a very long article, but the first half is a great summary of the funding landscape by stage of startup in 2020. (Note that the pre-seed, seed, A/B/C criteria and funding landscape is fluid and changes all the time - so make sure you check the current state and also make sure you do not assume what you learned in, say, 2015 still applies.)