There are two objectives that tend to dominate the time and energy of most early-stage startup founders: fundraising and hiring. The latter is often impossible without the former, but a founder needs a team to support them while they’re focusing on raising capital. It’s a difficult balance, and one with which many founders struggle, particularly if they’re inexperienced at dealing with VCs.
Last year, Anna Briggs spent several months interning with the Kindred Capital team and during that time, the fund made its final investment into a new portfolio company out of Fund I. That milestone provided an opportune moment to look back at the successes (and struggles) of the portfolio, in particular what strategies had led to raising substantial Series A funding after Kindred’s Seed-stage cheques.
What began as a research project for Anna resulted in writing a comprehensive guide to Series A fundraising, with the goal of helping founders set themselves up for success after they’ve secured a Seed round. Anna spoke with dozens of founders and Series A investors and also sifted through the massive amount of content available to identify the most useful and actionable resources.
In the spirit of Kindred’s Equitable Venture model, we want to share this guide not only with founders of Kindred’s current and future portfolio companies, but with anyone who is raising early stage capital. The sections proceed chronologically, beginning with benchmarks of best-in-class metrics a business should be achieving to go out and raise a Series A. We’re sharing this out in two sections, Part 1 includes benchmarks of key metrics, the fundraising timeline, and advice for running a process driven by momentum. Part 2 includes guidance on honing your pitch narrative, building a compelling deck, preparing for due diligence, organizing a data room, and what questions you should ask investors.
Massive thank you to Christian Owens, James Field, Sho Sugihara, Felix Neufeld, Steven Novick, Itxaso del Palacio, Sam Cash, Colin Hanna, Julia Morrongiello, Sasha Astafyeva, Pippa Lamb, Yacine Ghalim, Michelle Coventry, Vaso Parisinou and the entire Kindred team for sharing your stories and insight to make this project possible.
Series A investors want to see that your startup has achieved product-market fit — what that means in practice will vary immensely from business to business. VCs are looking for evidence that demand for your product is beginning to pull you into the market, that you have a proven and repeatable go-to-market strategy, and you can demonstrate strong retention and engagement with your current product.
The Metrics: What do I need to raise a Series A?
In 2018, the median time for European startups to get from Seed to Series A was 18 months. However, timing doesn’t dictate when you should start knocking on investors’ doors. £1M in ARR is often referenced as the KPI representing minimum scale for SaaS companies looking to raise a Series A, but truthfully there is no magic number for any business type that will ensure you raise a great round.
Acknowledging that early-stage funding has grown rapidly in recent years and what is considered “Series A-ready” is a moving target, it’s still helpful to know how your business is tracking relative to expectations.
We’ve curated a matrix of best-in-class Series A benchmarks by business type — SaaS & Enterprise, Marketplaces, B2C and B2B2C — by speaking with a range of investors and compiling the most helpful data points available online.
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Your Seed money is in the bank and you’re back to build mode — you may feel like raising your next round should be the last thing on your list of priorities. That’s okay for the moment, but while you’re in this “steady state” it is important to build relationships and keep key investors updated on your traction.
Steady state starts now and runs until six months before your cash out date. During this phase you’ll connect with a select group of top investors through warm introductions, keeping your startup on their radar before you need to ask them for money.
Consider seasonality of your business as well as major holidays. Ideally, aim to begin actively fundraising in September or February to give yourself enough time to close the process before your investors (and their lawyers) go on holiday. If your business has inherent seasonality, try to arrange for your first pitch meetings to fall midway through the seasonal ramp-up so you can show accelerating growth rather than a post-peak slump.
Active fundraising will likely to take longer than you think. Make sure you have a minimum of six months’ cash runway, because it typically takes that long until the process is fully complete. Aim to raise enough money to give yourself 18–24 months of runway.
During this period, you will need to actively manage the process to build momentum.
The Process: Steady State
Although you may feel like the “always be fundraising” mentality can be a distraction, founders who utilise their steady state to curate a group of VCs they actually want to work with are able to eliminate the risk of being forced to sign a term sheet from an investor they don’t like. These founders create a favourable market for their Series A shares by only pitching to investors they’ve already vetted.
Use this time to make a list of your top-tier, magic wand investors: individuals and funds across geographies who would be the most value add and profile raising for you. Add around 20 more good-to-great second tier investors. The rest will fall into your third tier.
A few important considerations when compiling your investor list:
- Track record and sector experience: do they understand your industry? Your customer? Do they have LPs or other strategic relationships to help you access a particular audience, geography or key client?
- Portfolio mix: How familiar are the partners with your specific business model? Is there a portfolio company at a more mature stage with a similar go-to-market strategy?
- Conflicts: This is an important one, and investors don’t always flag this before your first meeting. Go through the fund’s portfolio and look for anything that might be a conflict. Actually ask the partner about conflicts during your first meeting — they might not answer on the spot if they’re not the one handling that company, but it forces them to go back and get more information to give you an answer.
- Aligned expectations: What type of growth is the fund actually looking for? Are they investing on a 10-year horizon and looking for 50x+ growth with the expectation that some companies will fail? Or are they a smaller fund that can sustain more modest growth expectations? This information may not be immediately apparent, so this is an important question to during your initial meetings.
- Capital availability: VCs (unfortunately) don’t have a free-flowing tap of unlimited cash and can only invest in your business if they have funds ready to deploy.
Now that you’ve created your tiered list, it’s all about building relationships. You want high quality introductions to this list, in order of preference:
- Founder that the investor has backed (and respects/likes)
- One of your existing investors who knows them well
- Someone else you know who knows them — for example, an angel investor who has gravitas in your market and credibility in the space
Always ask for feedback. What would the investor need to see in order to get excited about this company? What are the metrics? Look for patterns in feedback, and incorporate it where appropriate. Keep in mind, however, that sometimes you’ll get feedback that’s antithetical to what you’re trying to build. Founders frequently make the mistake of being swayed by investor opinions — know when to stand your ground.
Deliver on your promises. Tell investors what you plan to achieve in the next 6 months, but don’t tell them your stretch goal. It’s always better to overdeliver, so tell them the goals you’re confident you’ll reach.
If you get an intro to an Associate instead of a Partner, try to make your way to the Partner as well. If you have a warm, strong introduction to an Associate, take the meeting and wow them. Get them on your side to advocate for you internally.
Keep track of inbound interest. Maintain a log of who made the introduction and reach out to them when it makes sense. Don’t take meetings with inbounds until you’re in active mode (unless they are in your top 5).
Steady state is also a good time to build relationships with potential advisors. Advisory boards are not always necessary, but if there is someone truly exceptional and well-connected in your extended network, keep them in the loop along with your top VCs. An amazing strategic advisor can be a great asset to your team, and for a successful Series A, you need to convey that your team is your superpower. Your advisory board, seed investors, and board of directors are a part of that.
The Process: Active Fundraising
The period of actively meeting with investors, pitching, performing due diligence, receiving/evaluating term sheets, negotiating, and executing the deal will take about six months. The stakes are high because you’re racing against your cash out date, so put yourself in a position of power by giving yourself enough time for the raise. It’s also critical to ask for enough money to give yourself an 18–24 month runway before the next round. This allows you to focus on your business before your next fundraise, giving you enough time to achieve your key metrics and milestones.
Fundraising rules of thumb:
- You’re selling 20–25% of your company at each round. You need to retain enough ownership in your company to keep yourself and your employees motivated, but keep in mind that it’s not worth over-optimising for dilution if it means losing a top investor.
- Raise enough money to reach specific goals plus a buffer for unplanned roadblocks. Don’t raise less than what you need, or far more. A gigantic round may earn press attention, but will also mean you’re on the hook to deliver exceptional results for your Series B.
- Valuation is what people are willing to pay for your company, and you should always communicate your fundraise in terms of the amount you’re raising rather than a specific valuation. At the Series A, revenue is generally too inconsistent to value your company based on specific multiples, so valuation methods can vary from fund to fund.
- Work with your Seed investors to develop your fundraising strategy and prepare all your materials. They have a vested interest in your success, and can offer a more objective view of how other investors will perceive your traction and growth trajectory.
- No fundraise will go exactly according to plan, despite the best of intentions. The money is a means to an end, and over-engineering the process won’t lead to better outcomes.
Here is an overview of what to expect at each stage of the process:
Running an efficient fundraising process
VCs will always miss some major deals due to the inherent randomness of which startup pitches they see. Investors are therefore notoriously driven by FOMO (fear of missing out), which is why it’s crucial to create momentum and a sense of urgency.
The fundraising process is predicated on an imbalance of power between investor and founder. When founders pitch to VCs, the investors already know how the company has been evaluated by their peers and how the deal is progressing. Knowledge that the deal is heating up, or that most other funds have passed, will inevitably impact their own opinion of the opportunity.
Running a tight process can tip the balance of power in your favour. Doing this effectively also signals to VCs that you know what you’re doing, elevating their esteem (and potentially valuation) of your company. Efficiently managing your meetings goes hand in hand with having a well-prepared deck, a comprehensive data room, and a thoroughly practiced pitch.
Building momentum in the syndicate and being oversubscribed will help you be in control of price, timing, and gives you certainty of completion. Here’s how:
1. Kick it off
- When you’re ready to begin the formal process (remember: it’s a sprint, not a marathon) email your top 10 investors and tell them you will besetting up initial meetings over the next few weeks. You should have been keeping these investors updated periodically for several months, so they should be chomping at the bit to get things going.
- Wait for as many responses as you can before getting meetings on the calendar. This may mean saying yes to a meeting but scheduling it two or three weeks out.
2. Schedule strategically
- Aim to schedule all first meetings as tightly as possible — within one or two weeks. Front load the schedule with second tier investors to practice your pitch and get initial feedback before going to your wishlist investors. The next round of partner meetings should also be clustered.
- Ideally you will move into final meetings or working sessions at around the same time with all investors, then receive term sheets simultaneously.
3. Stimulate competition
- Communicate a sense of urgency to investors who have shown interest but haven’t yet issued term sheets. Give a deadline for term sheet submission, but be realistic about the timeframe you share. You can’t expect a top tier investor to turn around a term sheet within a week of your first pitch. If you put them in that position, they’ll pass on the deal.
- Once a term sheet has been issued, you can let other investors in your pipeline know, but don’t share who it’s from or what the price is. The VC world is very small, and collusion between investors could work against you. The exception is a term sheet from a top tier investor — sharing the name sends a signal to other VCs and creates more FOMO.
4. Set an end date
- Term sheets in hand, you’ll move into the final DD and execution stages with all VCs, and you won’t have to go back and forth between in-depth diligence inquiries and high-level pitches. Set a hard deadline for yourself to close out the process and get back to building your business.
Next up, Part 2, where we cover the details of how to structure your pitch deck(s), preparing for due diligence, organizing a data room, and questions you should ask investors. In the meantime, see below for some of the most useful fundraising articles around.
- When to Raise a Series A
- The European Series A Landscape
- Point Nine Capital’s SaaS Fundraising Napkin
- Top 5 Metrics VCs look at for Series A/B/C (SaaS)
- A Quantitative Approach to PMF
- SaaS Metrics: Benchmarking Your Churn Rates
- SaaS Private Survey Results Part 1 & Part 2
- History of Public SaaS Returns and Valuations
- Benchmarks for Series A
- 10 Marketplace KPIs that Matter from Accel’s Andrei Brasoveanu
- Point Nine Capital’s Marketplace Fundraising Napkin 2018
- The Speedinvest x Marketplace Scorecard
- How to Measure CAC in a Two-Sided Marketplace
- WTF is Marketplace Liquidity?
- Top Ten Metrics for Digitally Native Brands
- Samaipata Ventures on measuring customer love for digital brands
- Andrew Chen’s Investor Metrics — how investors use metrics to evaluate, pick, and reject startups
- How to Actually Calculate CAC
- Mobile Apps: What’s a Good Retention Rate?
- 40% rule for cash burn
- What does it take to raise your next round in 2018
- Don’t Over Optimize Fundraising
- 5 Tips to Go from Term Sheet to Money in the Bank
- How to Trigger FOMO Among VCs
- 36 Fundraising Tips for Series A
- Process and Leverage in Fundraising
- Raising Venture Capital
- How to Pick a Term Sheet
- A Strategic Guide to Preemptive Funding Offers