Things all Founders wanting a strong Series A round raise should know

Bykc_admin

There are many things that must be done to ready a company for advancing to a Series A round of funding. Getting in the door of a venture capital firm to present your reasons you should be funded early or late in the startup cycle is difficult enough.  Series A round means you’re asking early money for sort of a leap of faith from Seed to after-revenue type funding.

Founders have to do their own due diligence when trying to vet the types of venture capital firms they want to target. Before you even begin looking into these firms, remember to get all the paperwork that is needed for investors to do their due diligence on you in a Data Room – preferably a virtual one. It is more important now for a Founder to be as ready as possible when trying to get this funding because of how much the investment world has changed over the years. Founders need to know what metrics potential investors are going to be using now before they create a pitch for their company. 

Tips for Series A Readiness

Here are some tips you should keep in mind prior to and during funding: 

  • Series A funding readiness may not look like you think; 
  • Timing matters; 
  • Networking is critical to success; 
  • You need a compelling narrative; 
  • Your pitch should be smooth and practiced; 
  • Put your paperwork in place early; 
  • You want the right VC; 
  • Your deal terms matter; 
  • Close fast;1 
  • If you’ve burned through your angel and seed rounds without demonstrating customer validation, you’ve got a problem; and
  • You’ll become a “real CEO” after you raise Series A. Get ready to learn new skills.

What Founders need to remember when getting into Series A funding, or any other round for that matter, is the time and cost it will take for a Founder to go through this process. It’s extremely likely you would need to contact multiple venture capital firms. There might be multiple rounds of talks with one or more firms if there is interest. This takes up a lot of time. 

Founders must be ready to handle the stress and the questioning about the business and why you as a founder think that the investor should give you money. Also, every round of funding is different when it comes to what an investor requires of the business because of the timeline they are looking for. 

It’s helpful to realize some of the expectations the venture capital fund manager is under. Their funds have – for their investors – an expected life until liquidity of the companies invested in and the fund by IPOs, acquisitions, or other means. So, when they invest, they are looking at a life cycle and road map for a startup. At Series A for absolutely the most successful startup stories you have a path moving maybe through Series C funding and then seeking liquidity just a very few years on. All that affects what the investor expects of the Founder and their company.

Startup companies and ideas have a story, but does your story include numbers?

What a Founder can talk about, like ideas and grand schemes on how a product or service will work, during seeding or angel rounds might not work once you start heading for the Series rounds. Investors in these rounds would need more hard facts than ideas.

At Series time, you would need to: 

  • have an adaptable business model that can be scaled quickly; 
  • have promising unit economics; 
  • be generating revenue on a scale that can help you manage the requested funds; 
  • have done the appropriate and correct market research to show where you will fit; and
  • made sure all the legal and compliance documentation is in order and current.

When trying to get this type of funding, a Founder must not only consider the part of the calendar year they are in, but also whether their business depends on the season. For example, if a company’s business is based on the season, then it would be best for the Founder to get the funding prior to this season so that they can be prepared with the appropriate service level for their customers. Also, a Founder must consider that the Christmas holiday season through November and December is going to be a difficult time for Founders to reach investors.

Investing in a company or stock is a personal decision and people are probably not going to do so unless they know what they are getting into. Plus, even then, they would need to trust the person asking them for an investment. You need to network with people and work that network to get people to trust your process. It is best to network with potential investors at a time when you might not need an investment so you can grow the relationship to a point where you have access and even invitation when you do need an investment.

While you are networking, you should also be creating a compelling story about your business. Having one will perk people’s interest in what you are trying to say because people love to hear a story, especially a positive one. Think of what Gerard Murphy, the CEO and co-founder of Mosaic has said, “Humans are hardwired to love a great story. Stories inspire us. Stories get retold. We remember stories.”2 

Preparing for your audition in elevators, lunch tables, and wherever you meet people

Think of your request for funding as a sort of audition. You perform well, and they applaud the performance with invested dollars. But you simply must do more than ACT. Prepare to tell the real story of potential for your company and remember to put numbers in to help tell that story in a believable way. Tell your story to friends and associates. Be ready to ‘pitch’ it on your plane flight or even your 20-story trip in the elevator.

Practice, practice, practice. This is important when trying to pitch an investor so they can give you money. Make sure that your pitch is as smooth as possible – but still true to who you are — so that you can have your wording, attitude, and timing down. You don’t want a pitch either too short or too long because that will show an investor that you are serious about their time and access to their money. You know they need solid information, and you know they don’t have all day. 

If you need help with this, try and find other Founders who have gone through the same process so they can critique your pitch and presentation and give you knowledge on how you can improve it. When presenting your case, it is best to assume that you might get questions and concerns from the investors on certain things in your presentation. You might not know which ones will come up but make sure you have answers for all the lines of inquiry you can think of. 

Data Room and Due Diligence

It is important to have a Data Room ready with your important documentation like legal, compliance, employee, other financing, company structure, contract, and intellectual property rights documentation as well as business plan, valuation, and financial statements. Considering today’s technology, a virtual Data Room would be best so that if the investor has any questions regarding your company that weren’t answered in your pitch, they can go there. 

Since you know that the investor is going to do a due diligence process on your company, it is best to also do one on the investors you want to talk to and eventually receive investment from. Not all venture capital firms will be appropriate for your business. They might not invest in your field or don’t have enough experience in it, or they might not invest in startups that are of your size. Some suggest following a 30-10-2 rule. This “rule” generally is for every 30 investors that you are introduced to, 10 are likely to want to see you with only 2 of these investors who would consider investing in you. 

Let Series A put you on the right path for a profitable future – Understand the terms

Assuming you do get Series A funding, it is a good thing to remember that these terms could follow you through future investing rounds. Because of this, it is best that you get the terms correct immediately. There are some things that need to be discussed here. 

First is the liquidation preference. When an investor gives money to a company as an investment, they are expecting a return on their investment. However, many investors also realize there is a chance that the company might go out of business no matter how hard everyone tries. In these situations, venture capital investors try and get their original investment back and get in the front of the line. 

Another point that is negotiated as part of the terms is what the vesting would be for the Founder. This is usually done to keep the Founder as part of the team for a certain amount of time after the funding.

Another, and equally difficult, provision is an anti-dilution right. This happens when a company must sell more shares of the company at a lower valuation, sometimes called a “down round”. Terms might require some protection for all other shareholders that lose their percentage of ownership within the company. This provision will give shares to the other owners prior to the selling of more shares to compensate for having to deal with the selling of more shares.

If you have other funding opportunities that will help you reach your goal and you are in talks with other VC firms, it might be a good idea to alert the ones you are talking to that your funding is getting closer and closer to your needs. If your conversations with multiple VC firms are going well, you won’t necessarily get a bidding war, but you may get one or the other to choose action by investing in you. If the venture capital firm was hesitating, the competition may get you past “consideration” and on to “funding”.  VC firms may even partner for involvement in your funding.

Being responsible for spending any round of funding

One of the issues a startup must deal with prior to going for a Series A funding is how they will spend their Angel and Seed funds. It is not wise to have a high burn rate for these funds for multiple reasons: 1) The founder might have to get more funding in this round to keep it going; and 2) It is worrisome because it shows the company might not be viable. Investors want to know that management can grow the company, but a company having a high burn rate will need to give more proof that the spending will eventually pay off. You need to show that you have done your due diligence on what strategies will fit your company. 

More funding brings more responsibilities. While the company was functioning up through the Angel and Seed rounds, the Founders and other management might have been able to get away with being a “jack of all trades” and do as much as possible. Getting a Series A funding will create other things that the Founder has to think about. It is best for the Founder to have some sort of managerial skills that can help them lead the company in different ways, like setting the vision for the company. 

So as the company needs more funding, it brings on more responsibilities and more worries. Of course, it brings more opportunities, too. The Founders must know how to handle these issues and know where to go when help is needed by hiring the appropriate team to guide the startup through this new round. By knowing the process and how to make sure you have everything ready for a Series A funding, you can use this as a guideline for future rounds – even though each round will bring different issues.

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