A Practical Guide to Series A Fundraising: Part 2
Fundraising is one of the activities that tends to dominate the time and energy of most early-stage start-up founders. We created this guide to help founders become more familiar with the Series A fundraising process. We believe everyone should have access to the same knowledge going into their fundraise to enable the strongest founders to succeed, not the ones with the most “inside info”.
In Part I we covered four sections: Metrics, Timeline, Steady State Fundraising and Active Fundraising. It was our most popular content to date and we’re hoping that Part II completes the fundraising picture. Here we’ll cover guidance on honing your pitch narrative, building a compelling deck, preparing for due diligence, organizing a data room, and questions to ask investors.
5. The Story
6. The Deck
7. Due Diligence
8. The Data Room
9. Questions for investors
Investors want to understand the narrative behind your company, your team, and your traction. For the Series A, much of this needs to be de-risked. An effective pitch identifies a thesis and demonstrates results that validate the thesis. At this stage, a significantly representative group of customers must be willing to trade a meaningful amount of time and/or money for your product. You need to convey (and therefore intimately understand) who these customers are and why they’re paying for your product.
Ahead of putting together your deck or practicing your pitch, spend some time thinking about your business as a brand — everything you do, make, say, and provide should be aligned.
1. PURPOSE: Why we do it.
Your Purpose is the motivation behind everything you do. Your Purpose is why you get up in the morning and why you burn the midnight oil to tackle the problem you’ve set out to solve. It’s the big “so what?” Clarity of Purpose allows you to build culture, instil ownership, and create community both internally and externally.
2. MISSION: What we’re doing.
Your Mission is the action you’re taking to execute your Purpose. It’s the driving OKR behind your business — it should be actionable, measurable and based on a specific time horizon (generally 3–5 years). Having a single Mission to guide all verticals of your business will drive day-to-day operations, provide individual leaders and teams with focus, help you set goals, agree on objectives, and get stakeholder buy-in.
3. VISION: Where we’re going.
Your Vision is the future in which the status quo has been disrupted and your Mission has been realised. The Vision is external to the business — it incorporates the future state of competitors and customers, and provides inspiration for you to keep driving forward.
Alignment of Purpose, Mission and Vision allows you to scale your business and reach a £1B+ outcome. With these three pillars firmly in place you can tell your story to investors with clarity and conviction.
Conveying the big, ambitious vision of your business is extremely important. Investors want to see that your market opportunity is huge and you have the potential to be the category leader. You have a repeatable sales process and it’s clear that £1 invested in your business will generate a large multiple of revenue. By the end of the deck, the investor should:
- See clearly why your success is inevitable now: You raised your Seed round on the basis of why your unique value proposition wasn’t possible before and why your team can do what others failed to do in the past. The traction you’ve built since then proves that you’ve achieved product-market-fit and your success is de-risked — now you just need to scale.
- Learn something. They should understand the end-to-end value chain your business sits within, including the incentives at play between customers, suppliers, and competitors. The unique value you’re creating within that landscape should be the lens through which you demonstrate your vision.
- Trust that the team in place is the right one to shepherd the business on the path to £1B. There may still be gaps — possibly major ones — but you’ve hired at least one exceptional exec since your Seed round, you have a clear hiring roadmap, and you’ve demonstrated you can attract the right talent.
- Understand the engine of your business: how you’re generating revenue (or how you will) and where your costs are coming from. They should also know who your key customers are today and in the future and that your go-to-market strategy is repeatable and scalable.
- Length: The full deck should be less than 20 slides.
- Versions: You will need a few versions of your deck to share at different times. Best practice is to create:
- A Pre-Meeting Deck. 5–6 slides with an overview of your company and your team. Send this to VCs ahead of your first meeting.
- A Meeting Deck. 10–20 slides with limited text that help you make your full pitch while in the room with VCs. Accompanying it is an Appendix with slides that specifically answer a certain follow-up question so you can easily pull up a visual during the meeting.
- A Post-Meeting Deck. Share this deck via a unique Docsend link after the meeting. This should include the core 10–20 slides from the Meeting deck, but with more text. The Appendix slides should not be included.
- Security: Protect the deck file with VC-specific watermarks. The data room you supply later on should be password protected, but in the initial stages you should allow your pre-meeting deck to be downloaded as a PDF.
- Demos: Almost every company has something they can demo live — the earlier this can be shown the better. You should be prepared to do a well-rehearsed 5–10 minute demo.
- Metrics: Avoid ambiguity. If you’re using metrics that are unique to your business, define them in the deck.
- Appendix: It’s difficult to master a balance between having a big vision (which is inherently fluffy) and conveying that you are detail-oriented and know all of your numbers. By diving deep into the details in your pitch — and having any questions that come up already answered within your Appendix — you’ll give the investor the impression that you know your business incredibly well. You don’t ever want to say “I’ll have to get back to you on that.”
- Pitching: Your pitch should be a conversation. The deck is just a jumping off point — don’t get too focused on walking the investor through each slide in order.
A quick search online will throw up many resources to help you determine which slides to include in your deck. Remember: the deck matters. Polish matters. Practice matters.
Due diligence for the Series A is more rigorous than it was for your Seed round. Investors will dig deep into your product and financials, so it’s essential to prepare early on and pull together all necessary documentation well in advance of a request. Advance prep will not only speed up the process, but you’ll be better prepared to answer investor questions in pitch meetings.
Once the process begins, it will become painfully clear what paperwork has gone missing or which contracts are unsigned. It’s possible to lose an investor due to lack of organisation — don’t let that happen to you.
Investors will dig into your team, product and tech, market, competition, financials and GTM strategy. Be mindful of how you’re presenting your metrics. This is a helpful article that provides quantitative frameworks that an investor would use to determine if you’ve reached PMF by analysing both and engagement signals.
Here are a few common mistakes founders make when presenting their data to investors:
- Cohorts: Choose the right time frame. If the product is meant to be used weekly, look at weekly cohorts, not monthly. Make clear what percentage of total users fall within a particular cohort. Don’t overemphasise cohorts that are performing better than others.
- User engagement: Consumer companies should create a histogram of users bucketed by activity level. What percentage are power users, occasional users, or disengaged? The best power user curves will have a smile shape: lots of users will be disengaged, a few users will fall in the middle, and there is a large group of wildly enthusiastic and highly engaged customers.
- CAC for Marketplaces: For marketplaces that have frequent churn of buyers or sellers, the LTV:CAC ratio should reflect acquisition and retention costs on both sides. Here is a helpful guide to measuring “fully burdened” unit economics.
One way to preempt some of the questions you’ll be asked during DD is to create an FAQ page on a password-protected website and share a link with VCs after your first pitch meeting.
The Data Room
Your data room should be a secure online storage location, such as a Dropbox. A complete and well-organised data room can save you precious time during the DD process, and any time earned in a speedy fundraise gives your business additional cash runway.
One person on your team must be tasked with owning administration of the data room on an ongoing basis. The whole team should be trained to send all contracts to the data room administrator or to add them there themselves. Be mindful about the folder hierarchy so documents are easy to find.
Deal costs are paid by the startup, so be efficient. Best practice involves getting regular fee updates from all parties as well as an agreement that you are alerted when the fee cap is approached.
Questions to Ask Investors
The relationships that you have with your VCs are personal. Not only is it important for your investors to add strategic value, you have to make sure their expectations, goals and personalities are aligned with yours. It’s not worth taking money from the greatest VC in the world if you have a completely different way of looking at the future.
Beyond the individual investor, you should try to figure out the company culture within the fund and the dynamic between partners on the investment committee. If you can tell that one partner loves your business and is advocating for you, but others in the room don’t believe in your vision, that could cause trouble later on when you’re looking for follow-on investment.
One of the best ways to learn about an investor is to speak with founders they’ve backed. Try to get in touch with founders of successful and unsuccessful companies to see behaviour at both ends of the spectrum. Make sure to find your own intros to people beyond the ones the investor sends you as references. You might also check out new review platforms like Landscape Ventures.
Below is a list of questions you might ask investors before your relationship is set in stone on the cap table. Some topics — fund strategy, capital availability, etc. — should be discussed during steady state (see Part I) so that you don’t waste your time when active fundraising begins.
Kent Goldman from Upside Ventures has great advice: never negotiate before you have a term sheet and don’t tell a prospective investor your price expectations. Be disciplined.
Internal communication rituals should be set in place before fundraising begins and remain consistent throughout the process.
The importance of company culture can’t be understated. Many founders put off thinking about how culture is manifested in training and development until they realize new employees aren’t getting up to speed quickly enough or employee churn is increasing. On-boarding and first day procedures have a lasting impact on culture and will help you scale your team efficiently.
Create a career ladder for your company, even if it’s bare bones. By the time you reach 10 employees, you should have something basic in place.
Don’t blow your Series A money on a lavish offsite, but do plan to bring the team together once funding closes. Create an event that is jam packed with activities and the creation of your company’s cultural artefacts: values, posters, handbooks, etc.
Think about your employee stock option pool as a budget. Work with your investors to determine who are the key hires you’ll need and budget for their equity accordingly. Some helpful tools:
- The Brief — a fundraising pitch tool from NFX
- Describing your product in one sentence
- What Should Be in My Fundraising Slides
- Why meeting Bob matters
- Tool for calculating a bottoms up TAM
- Flywheels: visual representation of competitive advantage
- Seed and Series A Deals: Nailing Due Diligence
- A Quantitative Approach to PMF