The Rule of 2

–> Take a startup’s business projections and multiply by 2, multiply by 2, and divide by 2. Successful businesses often require 2x projected capital needs, take 2x as long to reach the investment goal, and attain 1/2x of projected revenue.

This is my back of the envelope calculation whenever considering an investment in a startup. Let’s look at Company X:

COMPANY X

• Funding Request = $1,000,000
• Goal = Cash flow neutral in 18 months
• Annual Revenue 3 Years from Today = $16,000,000

Here’s what I do:

Apply the Rule of 2

• Money Company X will actually need = $2,000,000
• Goal = Cash flow neutral in 3 years
• Annual Revenue 3 Years from Today = $8,000,000

Keep in mind that this is often the result of a successful business and not every business. Successful means you are some small % of the 1% of business ideas that get to a point where there is a paying customer and real revenue. This is obviously not an exact science. The Rule of 2 is a good starting point, a good sketch. Given the Rule of 2, does the business still get to a point where a venture capital investment return is realistic?