Why WoW Growth Is So Critical to Close Your First Round
A startup is about growth, that's what Paul Graham used to say in one of his iconic essays. Let's see how much important growth is when you move your first steps into the market.
Our team at Lombardstreet Ventures is small by design. We are just three, and we aim to stay small, managing one small fund at a time. We designed our company this way because we love to work and invest in companies when they are very young. The ideal sweet spot for us is twelve weeks after launch. You can call it Pre-Seed or Seed, but the company business is just beginning.
I read an interesting article by Lenny Rachitsky about what is considered a reasonable growth rate for a company to raise a good or excellent investment round. Lenny’s article talks about the “early stage”—but not just that—, and after reading the data he gathered from interviewing primary VCs, they all came to a single conclusion:
“it’s not about growth rate, but how much time it takes to reach $1M ARR.”
My reaction to reading that post was:
“Well, it depends on what you mean by an early stage.”
For us, it means twelve weeks after launch.
So, how do you measure the company velocity in that case?
It is not the Time to One Million—let’s call it TOM—ARR. Twelve weeks is the perfect time to write a $500K check and still get some stake in the company. Unfortunately, the amount of capital needed to get x% of a company a few months after launch almost tripled in the last four years. And we can argue as much as we want if we have reached or not a turning point in startup valuations. But still, if you're going to be part of this game, you need to accept that it’s all about investing in good deals, not reasonable valuations—even if we all hope that things slow down. They all say that late rounds slowed down and suddenly became harder to raise, but that still, it doesn't affect the Seed stage—even if I’m sure it will, eventually, so think twice before calling a $100M cap cheap when you raise a seed round.
The fact is that founders today have a lot more cash in the bank to prove their ability to start scaling the market. They are working on scaling while still building the product, and everything is so uncertain and in constant change. The basic idea is that launching the product is not just making it public for access and writing a post on Hacker News. Deciding when and how to launch is becoming more critical because when founders do that, VCs start to evaluate their numbers.
Be careful, though. More cash in the bank doesn’t mean more time to grow. Velocity is not defined just by the growth rate but also by how much time it takes the company to launch on the market. Depending on the area, this time can vary a lot, but we all agree that it’s measured in months, not years, in the software business.
Given this premise, it’s easy to understand why we consider the WoW—week over week—growth rate so crucial while evaluating the investment opportunity. If that growth is organic, it somehow proves the ability of the founding team to get customers involved and in love with their product. It means you’re—probably—onto something, and most importantly, with the right people in your team to get it.
So, early growth is not just a measure of your escape velocity but also a clue of you choosing the right people.
Another way to say it would be: “make something people want, with the right team to make it happen.”
In the early days of a company, we can only invest in people's potential because all the rest is unstable or temporary. The WoW growth becomes a different way to evaluate how smart and industrious the team is in a situation with multiple boundaries and a very competitive market.