From seed investment to Series A
So you got your seed investment and are working on your Series A milestones. But what Series A investors need to see may be different than what you are preparing to achieve. As early-stage investors, our biggest focus is to help our portfolio companies reach those milestones before running out of funding. As such, we prepared the Seven Essential Elements of getting to Series A:
1. Demonstrate Product-Market Fit
Your seed round was your ‘exploration’ round, but by the time you reach Series A, VCs want to see that you have achieved Product Market Fit and the demand for your product is beginning to pull you into the market. This could be shown through short sales cycles, strong lifetime value, retention curves, organic adoption, etc. You should be very methodical and data-driven and show that the market is starting to adopt your product.
2. Show Traction
Traction is a good reflection of what your customers think about your product, but the key is the speed at which they adopt your product. There is no one single metric that would define your traction and it often varies widely by context, but you want to show strong Month over Month growth. Series A investors are often looking for an inflection point and want their money to fuel growth. Don’t just show top-line numbers, but how much effort, in what time frame, was put in to reach those numbers and which channels are driving the majority of it. The absolute y-axis isn’t as important as the slope of the traction curve. The key here is that there have been enough quality sales that investors can be confident there is predictability, scalability, and repeatability in the numbers and not just a series of one-offs.
3. Show a path to $B business
The mindset and mechanics of VCs are that every investment needs to have the potential to return the whole fund. Therefore, you should show there is a path forward to become a $B+ business. You can start with an apparent and well-executed niche that can bring in $50M in revenue but show adjacent opportunities that you can exploit, once you capture a portion of the market share or increase the TAM.
During the seed stage, you perhaps experimented with various channels and refined your Go-to-Market, but at Series A, you’re going to double down on what’s working, with a well-defined strategy to achieve scale. You should clearly outline the growth levers and how raising your next round can help you double down on those. Show that you have a demand pipeline that’s just waiting for you to unlock it if you can just scale-out your supply or services with more funding.
4. Develop Your Team
Recruiting and building out a strong team is another post in itself and perhaps THE most important factor for building a $1B+ business (I’ll discuss it in my next post). During your seed stage, you perhaps worked with team members that are generalist, scrappy, passionate, and quick at building and testing a product, but in Series you want to recruit people that can help you scale. It’s important to show that you’ve been able to attract top talents and plug gaps in key areas where your founding team is deficient. This could be in the form of either employees or advisors. You want to show that your company has real magnetism and demonstrate your ability to hire people that bring perspectives, qualities, and experiences beyond those of the founding team.
5. Build a Compelling Narrative
Great founders are often great storytellers who can paint a vision of a future and convince investors and employees to partner with the early days. Ultimately, fundraising is an exercise in building trust. The key to building a clear and compelling narrative is to frame the problem, describe how to solve it, explain the ultimate visions, and paint the picture of a world without that problem. Lastly, show why YOU are the right person to do this. You should be able to point to an ambitious and bold vision.
When pitching, you need to take the whole room on a journey together, this means that there has to be a narrative arc with a beginning, middle, and end. You should practice constantly, continuously, and adaptively; in a room full of people that don’t understand your business; develop one minute, 15 minutes, and hour-long pitches. Create a list of questions that you get asked and prepare an answer that is well-aligned with your vision, mission, and strategy. Before going to every meeting, you should think about the biggest concerns they might have, and address them early on. If a small TAM was a concern in your last two meetings, you should prepare a slide that addresses that in detail. Lastly, a well-prepared and well-practiced pitch deck is also crucial. Here and here are some good examples.
6. Be authentic and don’t oversell
It’s great to show that you’re excited about the prospect of your company and the “HUGE” deal that you think you’ll sign. But it’s better to set a more realistic expectation and exceed those expectations. It’s also a major credibility boost when founders talk about their prior mistakes. You can earn credibility by being vulnerable and showing previous mistakes you made. Be specific about customers vs. pipeline. If you’re going to talk about market size, do it in a well-thought-out way, not just throwing numbers that don’t reflect your obtainable market. Be very genuine with your remarks and truthful in your presentation. You don’t want to trigger B.S meter!
7. Create Positive Signaling
VCs look at 100s of pitched every month and they’re conditioned to make decisions based on little information; therefore, they try to detect the signals that will help define the company’s potential. Some example of positive signaling:
- Having top advisors/investors/executive team that know your space very well. This will create social proof and makes investors more prone to taking risks.
- If you think you can raise a large round, set expectations a little bit lower and let competition drive the amount up. An oversubscribed round will create Fear of Missing Out (FOMO).
- Set a fundraising timeline and treat it like a sprint, not a marathon. The longer you are in the market, the more negative signaling you’ll create. Give them a timeline for the term sheet. Running a tight process can tip the balance of power in your favor. Schedule meeting strategically.
- Create momentum and stimulate competition. Mention that you’re talking to other VCs and create a feeling of urgency and scarcity. Doing this effectively also signals a sense of competency to VCs and could elevate their esteem and potentially valuation of your company.
- Try to get the best intros, or possibly, multiple intros to show investors that others are interested. If you get a term sheet from a top-tier fund, communicate that to others.
- It’s often best to raise money when you don’t need it or have at least 6–9 months of runway given your current burn rate. This gives you a lot of leverage and allows you to build relationships with VCs early.
Having a strategy and a plan ahead of time can significantly increase your chances of raising a successful venture round.
As always, I welcome feedback and suggestion. Drop me a note if I can be of help in strategizing for your next round. I understand how daunting this process might be. My email is [email protected]