Roadmaps and Consensus Reality for VC-Backed Startups

It’s essential to have friends who make you think. Venkat Rao is my most reliably mind-expanding friend; his Ribbonfarm blog and newsletter regularly rewire my brain with new frameworks and unexpected perspectives. This post was inspired by his latest newsletter / tweetstorm: Roadmapping for Flatlanders (go ahead and read it, I’ll wait).

Because I spend nearly all my time thinking about how venture-backed companies succeed or fail, the pattern that jumped out at me within this framework is the idea of progressive cash-out dates / financing gates as the default roadmap for startup founders.

“56/ How do you use a roadmap? Think of it a canvas on as which your decision-making plays out. If you’ve defined your roadmap well, your planning can be highly agile/improvisational.”

Every company is different, and the infinite variations in founder abilities, opportunity windows and competitive dynamics are what make the game of building companies so fun to play. But when you zoom out from the day-to-day intricacies of decision-making, action and reaction that are unique to each team and company, the roadmap of venture-financed companies is highly repeatable.

By definition, venture-backed companies consume capital; they are purpose-built to seek dominance on an innovation vector through hypergrowth, with self-sustaining profitability coming very late in their growth cycle (typically post-IPO). An entire sub-specialty of finance has evolved to support this business model, with specialist investors operating at each layer in the stack – from pre-seed and seed through successive letters of the alphabet, all the way to mezzanine and crossover investors who invest (they hope) right before the public offering.

Each class of investor has a set of heuristics that they apply when evaluating an investment at their stage; teams that match those heuristics get funded, and teams that don’t usually go out of business. Because each stage requires support from the next level in the stack to progress through the system to an eventual liquidity event – the unifying and animating force of all players in the game – there is a broad consensus reality that emerges around the heuristics for players at each level.

For example, a year ago it was broadly understood that an Enterprise SaaS business could begin to attract the attention of serious Series A investors when it achieved a run-rate of $1MM ARR (annual recurring revenue). Firms that achieved this milestone – particularly ones that had at least tripled revenue in each of the prior few years – were likely to receive a new round of funding and progress to the next level in the game. Firms that didn’t were likely to go out of business, or worse, eke out a fundraise that allowed them to fight another day but likely disqualified them from further participation in elite tournament play.

This consensus reality among venture investors imposed a default roadmap on all Enterprise SaaS CEOs seeking to uplevel to the Series A battle-map: with the cash currently on hand (and months of clock-time it affords based on current and projected burn), meet or exceed the $1M ARR expectation or radically shift your risk / expectations model for your next financing event. The CEO could make whatever tactical decisions she wanted about team, product, sales and marketing within that time window, but the roadmap would remain as an external bound on her degrees of freedom for those decisions.

“49/ Roadmaps model patterns of avoidable risk based on information from less-than-completely-trustworthy counter-parties who share some of those risks.”

But what happens when consensus reality shifts? Over the past year or two, investor anxiety has risen about the Enterprise SaaS opportunity. Too much seed capital has resulted in a crowded and noisy landscape of companies competing in every imaginable niche. Enterprise buyers are losing patience with the proliferation of point solutions and are increasingly seeking vendors who can consolidate and simplify both the datasets and workflows that enable key business functions. As a result, the goalposts for Series A have started to shift upward, with $2M ARR emerging as the new consensus reality milestone for a successful Series A fundraise in Enterprise SaaS.

From the perspective of a founding team, VCs are “less-than-completely-trustworthy counter-parties” because they can unilaterally change the rues of the game by shifting their consensus reality. VCs are playing on a different battle-map that is generally opaque to startup founders, but when the VC battle-map changes it fundamentally changes the battle-map / roadmap for founders. If your burn model and cash-out date were designed around a $1MM ARR milestone, your risk calculations are radically different when the consensus milestone is doubled. You may not like what that change does to your business strategy, but if you ignore it or pretend it hasn’t happened you will probably fail to achieve the next level of play.

“51/ Should you have a roadmap? If there are manageable known unknowns that might drastically affect outcomes in your future, yes you should.”

The best startup CEOs are able to dynamically toggle between the daily struggle of running and team and building a business, and the delicate work of probing the capital markets to detect subtle shifts in consensus reality that could impact their risk calculations and drive decisions on when to attempt the next financing up-level. Successful management of this external roadmap is the primary determinant of success in venture-backed companies, and defines the risk calculation for nearly every important decision the founders have to make. Within this framework, startup decision-making can be (in Venkat’s words) “highly agile/improvisational”, but failure to accept the financing roadmap as a constraint turns an already high-risk game into one with unbounded risk, and vanishingly low odds of successful play.