The Startup Validation Trap (Hint: It’s Not About Revenue)

99% of entrepreneurs calculate this wrong. Perhaps that’s why most startups fail.

Photo by Vitaly Gariev on Unsplash

One of the strangest questions I’ve found myself wrestling with over the past year is also one of the simplest: When does a business become legitimate?

It’s a surprisingly difficult question for founders to answer, largely because most of us assume we’ll know the answer when we see it; at the very least, there will be clear-cut signs.

On paper, you could assume legitimacy arrives when you incorporate. Some might argue it’s when you file a trademark application, open a business bank account, or submit your first tax return. Others might claim it’s when you land your first customer, hire your first employee, sign a commercial lease, or convince an investor to write a check. If not then, surely it must happen when you hit a certain revenue milestone, right? Ten thousand dollars feels significant, but then again, maybe it’s the first hundred thousand, or perhaps a million bucks is the true mark of entrepreneurial legitimacy.

The longer I’ve spent around entrepreneurs — and building businesses myself, the less convinced I’ve become that any of those milestones actually establishes the line between a pipe dream and a credible, formidable startup with a promising future.

I was thinking about this recently while reflecting on how absurd most startups look in their earliest days (mine included). When you’re standing in your kitchen mixing ingredients for version one of a product, creating wireframes for an app that may never garner a single user, or trying to convince a potential partner to take a meeting, it’s easy to feel like you’re participating in an elaborate fantasy. You may tell people you’re building a company, but you might privately wonder whether you’re just a delusional side hustler whose optimistic imagination is conjuring up future profits that may never materialize.

The good news is that if you study enough successful companies and talk to transparent entrepreneurs who aren’t so many decades removed as to forget their origin stories, you’ll realize that many of those founders experienced the exact same uncertainty.

I doubt Evan Spiegel felt like the CEO of a future billion-dollar company while writing the first lines of Snapchat from a dorm room. Do you think Sara Blakely knew she was building a category-defining brand while cutting the feet off pantyhose in her apartment? Did countless founders whose names we now associate with unicorn status or household brand names wake up every morning overflowing with confidence that their outcomes were inevitable? For the vast majority, that’s a hard no.

Most successful startups spend years looking remarkably similar to unsuccessful ones, which raises an uncomfortable question: If the inception of both failed and successful startups looks so similar, exactly how and when can (or should) we validate our early-stage venture as a success-in-the-making versus a pipe dream begging for you to “take it behind the barn and shoot it”, in the words of a colorful investor you’ve seen on TV?

The Investor Validation Myth

For many founders, investor interest occupies a unique place in the validation hierarchy: Customers are nice, positive feedback is good, and organic growth is affirming, but investor interest feels different. Investors are supposed to be professionals who evaluate opportunities for a living. Thus, it stands to reason they’re inherently more qualified to separate good businesses from bad ones than the layperson, a.k.a. the average consumer or prospective distribution partner.

That line of thinking is why so many founders quietly treat funding as something much more meaningful than capital or even growth. What they’re really excited to receive isn’t merely money; it’s confirmation (of their startup’s legitimacy or future outcome).

I’ve seen founders spend years chasing that confirmation. Sometimes they tell themselves they’re raising capital to accelerate growth, but if they’re honest, part of what they’re seeking is reassurance. They want a sophisticated third party to look at their business and effectively say, “You’re not crazy or overly optimistic. This startup is real, has potential, and will provide a return that dwarfs the risks and sacrifices it requires.”

The problem is that investors aren’t psychics, don’t bat 1,000 (or anywhere near it), and can’t actually provide a fraction of the certainty founders think they’re buying.

Founders seem to entirely discount the myriad examples of companies that raised enormous amounts of money before collapsing. Furthermore, venture portfolios are built on the assumption that many investments will fail, so even full-time VCs know their judgment is wrong most of the time. Nonetheless, to most founders, obtaining interest, a term sheet, or a closed round from esteemed investors seems like a credibility-confirming milestone, as if that step is the victory in itself.

Here’s what those founders forget: Even post-funding, the outcome (and long-term legitimacy) of their startup remains unknown, and fundamentally speaking, the only real difference is that they now have more resources in their tool belt, but they also have more mouths to feed (equity holders) and more people to answer to. If investors could provide certainty, they wouldn’t be taking a 20% stake, and they probably wouldn’t be sharing the deal with you to begin with.

The Revenue Validation Myth

While the rising popularity of startup-focused publications and media (including shows like Shark Tank) has put capital raising at the forefront of the entrepreneurial world, there’s another startup credibility myth that sounds a lot more logical than the aforementioned fundraising milestone. I’m talking about revenue. Oh, and investors are largely to blame here, too. They often treat revenue as a confirmation of a proven concept, yet they ignore the elephant in every startup’s room: Revenue is not profit, is not all created equal, and does not guarantee the future trajectory!

Despite all that, revenue is often spouted as a key metric and can create a perilous illusion for founders who aren’t entrenched in the weeds of their startup’s finances (as we all should be to some degree).

Nearly every entrepreneur I’ve met has attributed some label of legitimacy to a certain revenue number. For one entrepreneur, it’s the first paying customer, and I can concede that if you’re a first-time founder, this feels like monumental proof you successfully made something someone chose to buy. Yay — but it’s still a long way from a certain success. For another, it’s $10,000 in sales or whatever number gives them the confidence to sign that 3PL contract or expand to a copacker. For someone else, it’s $100,000, $1 million, or even $10 million.

The exact figure varies, but the underlying belief remains remarkably consistent: Once I reach that number, I’ll finally know this business is real.

What’s interesting is how rarely reality cooperates with that expectation.

A founder who once dreamed of making their first sale eventually makes it, only to become consumed with acquiring the next ten, 100, or 1000 customers. A founder who celebrates reaching six figures in revenue soon becomes preoccupied with reaching seven. Someone who once thought $1 million would eliminate all uncertainty suddenly begins worrying about profitability, sustainability, competition, retention, or scale. The target keeps moving because the milestone was never actually providing the finite assurance we’re all seeking.

Revenue answers one question extremely well: Did someone pay for what you’re offering?

That’s valuable information, but it doesn’t tell you whether the business will still exist five years from now. Most importantly, today’s revenue snapshot doesn’t tell you whether you’re building the next great company or simply experiencing a temporary moment of traction soon to be dethroned by an industry collapse, economic upset, or disruptive competitor you couldn’t foresee.

The C-Word Missing From Every Startup

This brings us to what I believe is the most difficult part of entrepreneurship: Between where a startup is today and where it might eventually go exists a gap that cannot be bridged by evidence alone.

That uncertainty can be particularly uncomfortable for analytical people, which many logic-driven founders (myself included) are. Being logic-driven, we’re seeking facts, metrics, concrete evidence, and indisputable proof that pursuing certain actions will yield certain results. The problem is that the word “certain” is itself anathema to the startup journey. Yet, for some reason, we entrepreneurs treat business as if it’s a mathematical equation that always yields the same predictable outcome.

News flash: It’s not.

Nobody goes to Vegas shocked they didn’t win a million bucks at the casinos. Even professional gamblers know the cards are stacked against them. Nonetheless, serial entrepreneurs are a lot less objective, and perhaps that’s because we feel there’s much more control in our hands. To some degree, that may be true, but it still isn’t fail-proof. The only way to eliminate the possibility of a long-term loss or ultimate failure is to bow out of the game altogether and refrain from starting a business at all.

Furthermore, you can’t deny the correlation between risk and reward, particularly in business pursuits. By that I mean, the longer you wait until overwhelming evidence exists to support the pursuit of a specific business idea, the greatest opportunity is likely gone and the reward diminished.

At the end of the day, the greatest entrepreneurial spoils exist in pockets of untapped arbitrage, where you know, suspect, bet on, or have access to something before the rest of the world, the market, or your competitors catch on. The longer you wait for that arbitrage opportunity to become broadly vetted and your hypothesis played out, the more market share you concede to the bolder parties willing to jump in earlier.

Unicorn Advice You Don’t Want to Hear

I was recently speaking to an entrepreneur who’s been making the press rounds lately, gushing about her startup’s newsworthy exit. We connected on a few key similarities: comically lean teams, adjacent industries, the same bottlenecks, and an almost identical bootstrapped model early on.

Still, one question begged an answer that she was happy to provide: At what point did she know the product they were manufacturing out of their spare bedroom and peddling unofficially at local farmers’ markets warranted selling their cars, investing their life savings, pausing their careers, and going all-in?

Her answer wasn’t caveated or vague; it was universal and direct: You just have to do it.

In her case, it was an easy decision: If they didn’t go all-in, they could guarantee their fetus of a venture would never amount to anything life-changing. If they went all-in, at least they had a chance.

With respect to the mark of legitimacy, she confessed that it wasn’t until she had a unicorn-level acquisition deal on the table that she acknowledged her startup as a definitive success, despite seven years of high growth and nationwide distribution across the biggest retailers.

Long story short, we all spend years seeking proof that our startups are legitimate, between investors, revenue, partnerships, trademarks, media coverage, customer feedback, and growth milestones. Yet, most of those signals become meaningful only after success has already emerged.

The uncomfortable reality is that nobody is coming to provide the certainty you’re waiting for. At some point, you have to decide whether the possibility is compelling enough to continue without it.