When to try to raise a series A round? When you BOTH need the money to ramp up your work AND you are ready to take on investors who want at least a tenfold return on their investment.
Generally your series A investors will, between them, hold a majority of shares in your company. If you have enough leverage to retain a majority share for the founders and employees, you're probably already funding at least part of your work from revenue. In that case you may not desperately need the investment.
Before you raise a series A round, be sure you understand the meaning of "Participating Preferred Shares."
Don't celebrate getting a series A round by using some of it to buy fine wine (unless you're in the wine business). You wouldn't celebrate getting a payday loan either.
I'm confused about what you're saying here. Usually a series A takes 15-25% of the company. Are you saying that for acquisitions for less than the valuation investors are the first to get paid? Because founders usually maintain control these days for at least the first equity round.
And the beat time to raise an A round is when you don't need the money but you can grow faster I'd you have it.
"The longer a company has been in business – or the less good a founder is at telling a story – the more concrete and certain the metrics of that business need to be. Part of the challenge companies that have raised too much seed money face is that the requirements they face for an A are significantly higher than for those who raise less. They generally wait longer for their As, so investors expect to see associated progress."
The tension that investors look at between time to executve and how much progress has been made is really interesting. Is the the time horizon (and thus expectation) very different for different industries? Is it relative to existing incumbents and competitors?
For me, the key question is: "how fast is the company growing once they figure out product/market fit?" Some companies find product/market fit immediately while others might need 2-4 years. The amount of time is partly related to skill, but partly related to luck, the complexity of the problem being solved, etc. So I don't judge too much on how long it takes to get to PMF.
But once someone has PMF, the question shifts to: "How quickly can the business grow and how large can it get?" The goal for most earlier stage VCs is to find companies that can scale to $100m+ in annual revenue in less than 10 years. If a company is at $500k ARR and tripling, then you can draw a path to it hitting $100m ARR eventually (e.g. triple annually three times, then double annually three times). But if the company is growing at 30% or 50% per year at $500k ARR, then it's nearly impossible to make a path to $100m+ ARR. It would take a company at $500k ARR and 40% annual growth over 15 years to hit $100m ARR.
To address the question of expectations in different industries: I'm always thinking about the path to $100m ARR. If an industry take a while to break into but then revenue can ramp up more quickly, that's okay. But the path needs to be there and work on the time scale of a venture fund (~10 years).
The time horizon definitely differs based on what you're trying to do, and the industry in which you're trying to do it. We've seen that our hard tech companies tend to need more money and time before producing meaningful milestones, and those milestones almost never look as they would for a pure software business.
Companies are usually judged relative to expectations in their field. This goes for founders as well, who are judged relative to everything else the investor has seen.
Ironically, the longer a company has been in business with slow growth, the less attractive it is to a VC doing early stage investment.
One would think that such a company can turn around and more easily become successful than a company which has only an MVP that generates no money, but that’s not how VCs see it. They want to see “traction”, and even better, a company amassing users like wildfire.
Twitter had no revenues for years but was raising at a $100M+ pre-money valuation because of user growth alone.
If Twitter had added a business model and generated revenue but didn’t have the hockey stick 5 years in, then VCs would actually be more averse to invest in it.
I would think the key if you’ve been in business for a while and have lackluster growth would be to sell investors on why the new direction you’re going in has so much more potential than what you’ve done so far. Even if it’s not a pivot, it might be better if it sounds like one. That way, instead of extrapolating from your current numbers (bad for you), investors can give you more of a clean slate.
Already having a userbase, revenue, a team, etc. in place is a massive advantage, because these things are so hard to accomplish. If you tell the right story, you should look infinitely better than an early stage company that pivots due to lack of traction (and the latter get funded all the time).
The Lindy affect applies to survival as much as it does to upside. If a business has been the same way for 30 years, it's much more likely to survive another 30 than a new company, but those 30 years will likely be similar to the first. Not all parts of the economy have such a fast up and down curve, so the 30-year business might be an appealing investment or not. Huge delta might be for some investors, but Lindy effect durability is very desirable to others.
If you're raising 1M+ in the midwest, it's straight forward. Get a meeting with a VC associate in the region (Chicago: HP VC, Origin, OCA) and they will tell you exactly what they're looking for in a Series A.
I've never had any success with getting institutional money at the seed stage, but if you do get it, it's even easier to bypass some of the troublesome checklist items you get in the A round.
All VCs are willing to give you a checklist of what they're looking for. I've never seen a VC actually willing to fund solely based on a checklist of objective metrics. This doesn't change based on region.
I work at a profitable product startup that has managed to avoid raising series A. As long as we can maintain the level of growth (which is honestly close to breakneck with integration work for each customer site) I think it's feasible to avoid raising/diluting while continue to grow but it's not the easiest experience I've had. Lots of blood sweat and tears, particularly from one of the founders.
I know some people might think the payout could be better raising series A and hiring to support growth as is the more common road. The founders are going a different route and so far it's going well. We can hire when we need to so not to worried there. I don't know if this is a weird case?
I think this more answers the question "when can you raise an A" than "when should you raise an A".
Series A and later are really helpful in growing quickly. You should raise a series A when it will give you a lot of growth per dilution -- that is, when you have a clear plan for how the money will help you grow quickly, and some evidence that your plan will actually work.
That was overly simplifying and I don't believe for a second Aaron literally believes you should raise any money you can simply because it's available. The downsides of raising money you don't need are something tons of founders, YC partners, and VCs have all discussed before.
> Because most venture returns are driven by a tiny number of companies, investors know that they need to invest in those companies in order to make money.
The trick, then, is convincing investors that your company will be one of those outliers.
The missing part in this article about "when", imho, is that _when_ might have a lot to do with the timing of a startup's outlier story and how well it matches with a particular VC's fund size.
I found a series A to be very ambiguous. Some people thought of it as a big late-stage seed and others had more series B type expectations.
IMHO the series thing is outdated. Just call it R0, R1, R2, R# where # is round number and be done with it... or move to a continuous fine-grained fund raising model.
Plenty of potential reasons. Stagnant growth, really poor executive team that got lucky, serving a dying industry, tapped out growth potential, poor unit economics, etc.
Financial or legal liabilities. Of the few rounds I got to see anything like transparency, I saw one get hung up because they had allowed an uncertified investor in during the seed. I think that guy might have been the only investor to get their money back because they had to buy him out and the money ran out before they closed the round.
(Some VCs are perfectly happy to let you run low on funds to get better terms).
It's just hard to get a business to $9m with too many of those in place, and I'm assuming that the unit economics of any SaaS are really good unless it's one of those products that is built on human labor like voice transcription.
Any pointers on the most polite but firm way to defer speaking with investors when you're not ready to raise?
We just raised Seed, and get 5-10 inbounds per week asking about Series A. I usually write something like:
"Thanks for the note. We recently closed our seed round and are not looking to raise at the moment. But we will definitely reach out when that changes."
Hopefully that's not too curt/dismissive? Thanks in advance for any tips.
That's a great response. If the investor is someone you do want to get to know, it doesn't hurt to set some time 3-6 months into the future for a short chat.
"...this doesn’t provide the sort of certainty I know founders want in answering the question of when to raise. However, I think that knowing that there is no clean answer is important because it provides a framework for thinking through the relative advantages you have when thinking about a raise."
In my experience, finding a framework when you're searching for a solution is not a consolation prize. When the consolation prize is the only prize, it feels like the first place trophy -- and it is, at that time. The solution doesn't actually exist yet, but now you have the tool to find it.
About a year ago, I had this inescapable feeling that I was spending my time poorly (not daily productivity but on a larger scale), and it was causing me a lot of anxiety. Then I read How Will You Measure Your Life? by Clayton Christensen. I walked away with a framework for finding out what I want to be productive towards, even though that thing -- whatever it is -- was no more clear to me. My anxiety disappeared, which is what I wanted all along!
There is - it's possible to miss your window. This usually takes the form of a company that has figured out how to start scaling revenue, does not take advantage of the leverage, and then plateaus as a function of not having the capital necessary to expand.
For the better half of these businesses, this ends up being ok. They settle into a slower growth model that produces a great cashflowing business. However there are others who are unable to get to profitability on remaining funds and die as a result of not having enough capital.
Starving your potential growth by not spending enough money? Failing to achieve usability by staying in your basement too long? Allowing competitors to get established before you? These seem like outcomes from waiting too long.
If I could downvote your comment I would because this is not an accurate synthesis of the article.
"more young, charismatic ivy league graduates" is not at all what the author describes. The author's thesis is that raising a Series A has requirements ranging between a Seed round which is based on, "the quality of the founders and the raw story that they can tell about their company and the future that company will create" and a Series B which is based on "[the] need to have accomplished a significant set of things that prove their ability to accomplish that future".
I know a (small) number of YC companies and they all have a "young, charismatic ivy league graduate" on board. I imagine there's some sort of subconscious bias at play here that equates those properties with "quality of the founders".
Be that as it may, if you're one of those people you can use it to your advantage and get away with less traction.
I know a large number of YC companies, and only a minority fit that description.
Being charismatic isn't entirely unrelated to one's ability to lead a company. You don't have to be slick, but projecting enough charm that people don't wander off while you're talking helps with hiring and sales.
You can learn to be acceptably charismatic if you put some effort into it. If Bill Gates and Jan Koum did it, you can too.
Young, charismatic ivy league grads are one specific instance of "the quality of founders ". Another, equally fitting one is, "A successful serial entrepreneur with an exit or two under their belt". Another, albeit seemingly outdated one is, "a former Googler". There are many ways a founder can be of high quality that are not ivy league grads.
Being a YC founder, I am not an Ivy league grad but a PhD drop-out who happens to have the combination of domain expertise, technical understanding, and charm.
Your poor conclusion of "ivy league grad" is ridiculous. If anything YC looks for doers not those that have.
If you would have said you were a high school dropout and poor communicator this would have made a point but PhD + charm is phenotypically similar to an attractive ivy grad so you’re kind of proving the point.
Please be aware this is your bias, your POV. You can't use it to prove your own point.
PhD is nothing similar to your connotation of Ivy League grad. The former requires years of sacrifice, ruined relationship, and missed experiences to master an esoteric part of science. The latter has the connotation of privilege.
To be fair, the school I went to was very particular, as it ran by the same university that ran the college I went to. In a way, a lot of the subjects we took early on were preparing us for college.
Generally your series A investors will, between them, hold a majority of shares in your company. If you have enough leverage to retain a majority share for the founders and employees, you're probably already funding at least part of your work from revenue. In that case you may not desperately need the investment.
Before you raise a series A round, be sure you understand the meaning of "Participating Preferred Shares."
Don't celebrate getting a series A round by using some of it to buy fine wine (unless you're in the wine business). You wouldn't celebrate getting a payday loan either.