Getting Series A Ready

At Real Ventures, we run a dedicated program of seed stage investments. To date we have made 34 of them + another 20 Founderfuel investments.

From our vantage point, we see a lot of seed stage funding happening these days. Capital from accelerators, angels and seed funds like ours is giving a lot of companies a shot at building something.

The growth in seed stage funding has not been matched by a growth in series A capital availability. That means it’s tougher to raise series A.  So we have a big effort starting at Real to make sure our companies have what it takes to be series A ready.

Defining Series A readiness

The definition starts for me with contrasting seed vs. Series A.

Seed funding decisions are based on some combination of:

–       Strong founding team (including at least one strong product / tech person)

–       Unique insight about a large market opportunity. That insight should be about a clear, identifiable problem and  a market wave that can be leveraged (or created, though that is tougher)

–       Clear, capital efficient initial milestone to fund against (building, launching and validating something)

Series A is about accelerating. This means that you have early proof of something that works. You have the beginnings of a sausage machine.

Breaking that down into specific check points that investors look for:

Opportunity:

–       Clear, unique, defensible insight about a large market opportunity

–       This opportunity can be validated by the investor with industry players

Product:

–       A first product has been launched, and validated in the market

–       Clear signs of meaningful user / customer engagement. Product / market fit has been established

–       Company has a comprehensive roadmap linking this first product to its overall vision

Go to Market:

–       Company has identified a first engine of growth: A clear channel for acquiring and retaining users

–       Company has initial data around cost of customer acquisition. Enough data to extrapolate to a Series A spend level

–       Company has a documented go to market plan

–       Momentum: early and consistently positive trends in terms of user acquisition, retention and (hopefully) monetization. Cannot overemphasize this: nothing gets investors more excited than traction!

Team:

–       Complete founding team: Product vision, technology depth and go to market knowledge

–       Key management team hires have been identified. Ideally you go into a raise with some specific candidates in mind that can be part of the funding story

–       Team passes all the usual sniff tests: passion, domain knowledge, intensity, intellectual honesty, data driven, self aware, transparent, etc.

–       Investors have deep confidence that this team can deploy the round and create value

Operations:

–       Company is data driven. Investors can see deep metrics. Founders know the numbers cold. The numbers don’t have to be great as long as they are headed in the right direction

Funding:

–       Founding team knows how to get in front of the right investors

–       Clear strategy for the raise: Raising the right amount to achieve the right milestones

–       Company is investor ready. Meaning:

  • Key documents are in place: Executive Summary, Investor presentation, three year financial model
  • Supporting documents are in place: marketing plan, product roadmap, industry / competitive overview
  • Due diligence ready: all existing legal docs, employee confidentiality and IP assignment agreements, etc are organized and ready for review

–       Company’s existing investors are participating in the round. OK if angels don’t. But if you have VCs on board at the seed stage, they had better be writing a series A cheque.

I’m probably missing some things. But if you check these boxes you are in great shape. Remember, in this market especially, investors have lots of choice and can afford to pick the best. The bar for raising series A capital is high.

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  • George Mobile

    Mark, you draw a picture consistent with what I'm hearing from VCs. However, I have also heard the same criteria required by many seed-stage VCs/Angel investors in Canada and the Valley. Particularly, the market/channel validation metrics. I am hearing they have 100s of startups to choose from and many do meet this test. Favoring them might seem less risky, but it might also skew to web-lite projects that have a more rapid time to market/lower cost than say a mobile product or game etc. What is your take on this and how do you filter opportunities?

    • http://startupcfo.ca Mark MacLeod

      There is some grey zone between seed and series A for sure. And all things being equal at any stage, investors prefer more validation over less. So it is possible that you're hearing that. Web lite plays are in vogue. We have a few in our portfolio but as a general rule we are looking for higher disruption potential and higher barriers to copy. So we are almost always funding building vs acceleration.

      • George Mobile

        Thanks Mark, yours sounds like a good strategy given so many great startups to consider these days! This also recognizes the cautionary tale with respect to "scaling prematurely" (the Startup Genome).

  • http://twitter.com/davmundy @davmundy

    Great post! An important difference that's commonly mashed together. Could you elaborate on what you mean when you say "defensible insight"? Thanks

    • http://startupcfo.ca Mark MacLeod

      Good question: the insight is a unique hunch about a new technical innovation or new market opportunity or both. Something you have thought of in advance of the market thinking about it. Defensibility means its not that easy for people to copy that insight.

  • http://twitter.com/kpooya @kpooya

    I like how you've separated "intensity" from "passion" when it comes to the team. #shouldhaveboth

  • http://www.markevans.ca Mark Evans

    Great insight…and glad to see the blog is back! Mark

    • http://startupcfo.ca Mark MacLeod

      Thanks Mark. The drama with the hacking is a good prompt to maybe freshen it up. redesign coming soon

  • http://twitter.com/_charlesbrun @_charlesbrun

    Great guidelines for any startup seeking funding. Thanks for sharing Mark! The point about being data driven seems particularly key. On that note, your Saas Math Slides gave a great summary of the key metrics all startups should be looking for.

    • http://startupcfo.ca Mark MacLeod

      Thanks Charles. SaaS math is one portion, but there's a lot more