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If you believe that your startup has reached a stage in its growth at which it makes sense to start thinking about and analyzing the possibility of raising Series A funding, it’s safe to say that you’re already on a good path, and congratulations are in order.
This means that you’ve managed to turn your idea into a viable business with the initial Seed funding you’ve received from angel investors, family or friends, bank loans, or a combination of any or all of those sources. That’s no small task. But neither is raising a Series A.
According to recent startup statistics, venture capital firms receive more than 1,000 proposals a year. What makes you think that your startup will be able to shine bright enough to attract a VC firm’s attention?
Series A is probably the most difficult round to raise for a variety of reasons. As a relatively new business, you’re still experiencing growing pains and need to continue to budget wisely in order to stretch your Seed funding to last as long as possible while you identify new ways to accelerate your growth.
That means that your startup probably isn’t anywhere near being able to successfully continue on its current trajectory without your full attention, making it impossible to focus 100% of your attention on fundraising, which, as you will see, can be a full-time job of its own.
According to recent data, only between 20-30% of Seed-funded companies successfully raise Series A funding. And that’s not just because the competition is so steep. Successfully raising a Series A requires laser focus and tons of work.
Once you’ve built a company that you believe justifies further capital, you’re going to have to consider how much capital that is, what you can expect to achieve with that amount of funding, and where you see your startup in the coming years as a result of that funding.
And that initial stage of self-reflection and planning is just the start of a multi-month process during which you are going to have to identify the right partners and then convince them that your vision is worth investing millions of dollars in.
If you’ve made it this far and still think you’re ready to start your Series A fundraising process, let’s take a look at the many responsibilities you will have in the earliest stages of this long and arduous process that lies ahead of you.
How Do You Know You’re Ready to Raise Series A Funding?
Knowing you’re ready to raise money has very little to do with intuition. It’s all about metrics. What are some of the metrics that VCs will typically ask to see from you? Of course, they want to see that you are already making money.
It’s not the VC’s job to help you find your market fit and your customers. If you haven’t been successful in doing that, it’s highly unlikely that a venture capital firm will be interested in putting their money behind you.
Are You Established Within Your Defined Market?
Proof of product and market fit is absolutely essential. It should be very clear to you at this point that your customers do exist and that a real need for your product or services exists in your particular market.
You need to show that people are willing to pay for your product or service and that what you’re selling serves a meaningful purpose for them. If this is true, you should be seeing customers not only buying and adopting what you sell, you can also expect to see them recommending your product or services to others without needing incentives to do so.
Are customers engaging with your product? If you are constantly receiving feedback and feature requests as you convert more customers, that’s yet another good sign that you are on the right track.
Having expert knowledge of your market is also absolutely essential. It’s also incredibly important to be able to clearly and passionately educate people about your market. Investors aren’t omniscient beings that have a working knowledge of every market and industry they invest in.
Venture capitalists will want to know what your market is all about, and most importantly, your market size and opportunity size. Make sure that you do your homework and have this type of data prepared. Use resources such as Crunchbase and Statista Industry Reports to support your claims about your market fit and your startup’s potential within the market with concrete data.
Are Your Financial Projections Encouraging?
Having a very detailed financial plan to show potential investors is also essential. Budgets and economic forecasts for the next three to five years are necessary and appreciated, but VCs are going to want more granular information so that they can understand how your company is spending and earning money month over month.
And while the numbers are certainly the most important part of the equation, being able to put together accurate and easy-to-follow financial figures and projections can earn you extra points with VCs who are, like it or not, judging every single move you make.
Venture capitalists appreciate seeing detailed plans because it assures them that you will be just as diligent reporting what you’re doing with their money as you are with your own. Additionally, showing that you can clearly demonstrate the strengths and weaknesses of your startup through data provides proof to investors that you have a very firm and unbiased grasp of everything your business is doing correctly and incorrectly and what areas you need to focus on in the future.
Are Your Customer Acquisition Costs on Target?
If we were to pin down one number that VCs tend to be most interested in, it would have to be your customer acquisition costs or CAC.
For example, if it takes you $500 to acquire a customer that’s going to be paying you a $2 monthly subscription, you need that customer to stay with you for 20 years just to break even. That CAC is not going to impress anyone and will undoubtedly bankrupt you in the near future.
Venture capitalists typically want to see your startup making thousands of dollars per customer over a period of a few years. This gives VC firms confidence that you are going to be able to quickly earn back the money they have invested in you and, hopefully, turn that money into profit just as quickly.
Not even having a million customers means anything to potential investors if you’re spending more to acquire them than you’re guaranteed to make back in a relatively short amount of time.
Are You Making Enough Money?
If you’re not generating $1 million in annual recurring revenue (ARR), you probably aren’t quite ready to make a run at Series A funding. However, tech companies that might not be generating enough revenue can often impress VCs by demonstrating that they have built a substantial foundation of active users, something that often bodes well for showing a product’s potential for exponential growth.
And that really is the key. Growth needs to be exponential if you want VCs to take notice. Many VCs want to see you double or triple your income year over year. So if in March 2021, you’re not making two or three times what you were making in March 2020, you’re going to have to dig deep to show these VCs other data that demonstrates why your startup is worthy of their investment.
What Does a Typical Series A Timeline Look Like?
No two businesses have the same exact path when it comes to funding. Some will look to close a Series A funding campaign as quickly as possible, while others might even look to get a Seed extension if they believe that there are still issues to iron out before taking that next step.
Even if the growth and revenue are both there, some startups need more time to mature than others; to make sense of their growth and what they believe their future should look like. As we’ve already learned, the variables are numerous, which is why it’s hard to talk about concrete timelines when it comes to Series A funding.
Are you expected to try and raise Series A funding within a year of raising your Seed? No. But the less time it takes for it to be clear that your startup is ready for that next step in fundraising, the more success you will probably have raising Series A funding.
And once you’ve decided to go for it, you will definitely need at least six months to get all your ducks in a row before fully launching into the fundraising process.
What’s Your Seed Funding Runway?
While timing is certainly not a fixed concept in fundraising, it is still a very important one. That’s why having a good idea of what your run rate looks like needs to be a priority. By knowing what it costs to keep your business running and calculating how long you’ll be able to sustain your startup with your current level of funding and revenue, you will be able to time your fundraising efforts accordingly.
Make sure that your list of costs is complete and exhaustive. That means salaries, rent, utilities, legal fees, bank fees, marketing budgets, supplies, software licenses; every expense you can think of needs to be accounted for in this process.
And don’t forget to leave some leeway for surprises and unexpected costs that can (and almost always do) crop up out of nowhere and at the worst possible time. Severe property damage caused by a storm, a vital employee leaving your team, an employee filing a lawsuit against you—these types of events are impossible to prepare for and can (unfortunately) happen at any time and without notice.
Team Coordination and Internal Communication
Fundraising is a long process, one that the leaders of your company are going to have to dedicate a considerable amount of time towards. As a Seed funded or boot-strapped startup, your leadership is probably very used to being incredibly hands-on and participating in every phase of your operation.
That’s not going to be possible if your goal is to successfully raise your Series A funding round.
Hopefully, your company is in a position to potentially attract venture capital firms because you’ve done a good job of putting together a quality team and supporting cast. If you want to be able to give fundraising the attention it deserves, you are going to have to delegate many of your everyday operational responsibilities to others and if necessary, outsource some of your startup’s key processes to third parties.
Founders and CEOs often have a very hard time delegating their tasks because they have gotten so used to keeping tabs on these things every day since the startup’s inception. But a true leader knows when it is time to focus on other matters and allow trusted colleagues to inherit new responsibilities.
While no one is saying that founders should completely ignore the daily activities of their businesses in order to focus their attention entirely on raising money, it’s going to be hard to prepare and execute a successful fundraising strategy without dedicating at least half of your daily work hours to this endeavor.
Fundraising can mean a lot of things to a lot of different people in your organization, which is why it’s important to talk about the process and be as transparent as possible with your staff during the process.
While one employee will see fundraising as a chance to ask for a raise, another one might interpret it as a sign that the company is floundering and needs to be “saved” by an investor.
Be honest with your team about why you are seeking funding and how you believe the investment that you are seeking is going to change the business. You don’t have to go into great detail and give out the names of the VCs that you are looking at, but don’t hesitate to answer employee questions related to things that can affect them directly.
How will the potential investment affect the product roadmap? How will the organizational structure change if an investment is secured? These types of questions will certainly come up, and answering them honestly can go a long way towards building stronger relationships within your team.
Fundraising is a very exciting time for any startup. However, your leadership should invest additional efforts into keeping the team focused on your product and your customers throughout this process.
Make sure that talks of fundraising won’t distract your team from what’s most important, and remind them that building a great product and keeping your clients happy is what’s going to push your company forward whether you receive funding or not.
Identifying, Researching, and Connecting with Potential Investors
Networking is a process that never ends in the startup world, especially when your company reaches a state at which it could potentially attract investors. Founders need to be proactive about constantly reaching out to peers and expanding their network of contacts within the startup and venture capital ecosystem.
Quality networking not only makes it easier for you to meet investors, it can also provide you with valuable insight from peers who may have already finished a round of Series A funding.
Meeting the Right People and Building Relationships
How do you even start putting together a list of potential investors that you would be interested in working with, and more importantly, could be interested in working with you? It’s really all about networking and meeting as many potential investors as possible.
Networking also allows you to keep an ear to the ground and gain crucial knowledge that could point you towards the right VCs. Don’t automatically assume that a VC that has invested heavily in your industry is going to do so again.
As soon as you enter the Seed stage, you should be putting an emphasis and added focus on networking and meeting as many people as possible and forming relationships so that when the time comes to start putting together a list of potential VCs to target for Series A funding, you’ll already have a good idea of where to focus your attention first.
Narrowing Down Your List
When you start compiling your list of possible investors, go crazy. Have at least 50 names on your list to start because there’s a good chance that you’re going to trim the list down very quickly as soon as you start diving heavily into the research process.
The first thing to remember is that most VCs aren’t working with an endless stream of money. They can only make a few significant investments per year. If you see that a VC on your list has already made a couple of big investments this year, you might want to cross them off your list.
Focus especially on VCs that you know have invested in your industry recently and have partners that clearly show a deep interest in and understanding of the domain in which you specialize. However, if you see that the VC fund has invested in a company that you consider to be a direct competitor of yours, you can cross them off the list as well.
Naturally, you’re going to want to rank the top-tier, most well-known VCs first, the smaller but still very reputable ones later, and the small, lesser-known funds last when getting ready to do your research, but never write off a fund just because they are smaller or regional in character, especially if they check every other one of your boxes.
Once you have a list that you like and one that seems realistic, start the process of screening every potential investor:
- Follow partners on social media to see what their interests are and how they communicate.
- Check to see what kind of companies are in their portfolios and whether you have any connections with their portfolio companies that could help you by making an introduction.
- See if the VC has been in the news or if there are any financial or PR issues that could complicate fundraising efforts.
- Look to see if they have a particular predilection in terms of what stage of financing they tend to prefer to participate in.
Once you and your company leaders have performed the initial screening process, make sure that you turn to your network again and consult peers, advisors, Seed investors, and other connections in order to garner more information on your potential targets and gain insights that you may not be able to uncover through your own research.
Generating Buzz Ahead of Fundraising Efforts
Now that you have a list of investors that you are happy with and you’re ready to start picking up the phone or sending emails to set up meetings, generating buzz should be a priority.
Are you close to releasing an awesome new feature that you believe will be a difference-maker? Have you recently made a superstar hire? Now is the perfect time to get these newsworthy stories out into the PR circuit and gain coverage from the media outlets that VCs pay attention to most.
If you have the funds to do so, run some targeted ads where VCs will see them; outdoor ads in major cities like San Francisco, Chicago, and New York City, or digital ads through Linkedin groups, podcasts, and online publications that cater to the venture capitalist crowds.
Ask your board members to get on the horn and start talking you up because if there’s someone that VCs want to hear from when it comes to evaluating startups, it’s the company’s Seed investors.
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It’s important to stress just how complex and detailed the process of raising Series A funding can be. If you’d like to find out more about what comes next in this journey, keep an eye on our blog over the coming weeks and months to learn about the following topics and more:
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