Are you an early stage founder trying to figure out what’s next in your startup’s journey? Check out more insights from the Next47 team in our Seed to Series A Playbook.
Raising a Series A involves a lot of moving parts. Ensuring your process is successful, especially in the current fundraising climate, requires doing each part well. But what, exactly, does “well” mean? And which parts should you consider? To help founders navigate this important step, we’re sharing some tips we’ve learned over the years – as founders and investors – that will help you achieve your Series A goal.
As a founder, you have some clear advantages when it comes to your Series A. You control the process and can prepare your company and team in the best way. You also hold the lead in strengthening relationships with prospective investors, and keeping your startup on the right radar screens.
As you pursue your funding round, there are a variety of things you’ll need to have ready, including your pitch, operating plan, and customer references; a variety of diligence items; a cleaned-up org; and ensuring you’re personally in a good place. Let’s take a look at each.
Your Pitch
One key building block in the run-up to your Series A is your pitch. This could be in the form of an investment memo, but most investors will be expecting a deck. Within the first five minutes of your pitch, you must be able to clearly express what the problem is, how your company has the unique ability to solve it, why the world is going to be a better place after you do, and that there are lots of customers out there ready to buy it.
The investors you’ll be dealing with have listened to hundreds or even thousands of pitches. They’ve seen the best and they’ve seen the worst, and within the first few minutes, you need to put yourself in the best category. Keep your pitch simple, precise, and clear. And once you’ve crafted it, ask for candid feedback from founders you trust and your existing investors. Take the feedback you receive to make your pitch even better.
One note of warning: If your Series A pitch looks exactly the same as your seed funding pitch, then you likely haven’t put enough thought into it. Be sure your pitch still has a big vision but shows what you’ve been able to prove out so far. You should also be able to articulate how you plan to accelerate building a company around your proven idea that is beginning to scale.
Your Operating Plan
Series A investors will expect an operating plan with some history. They’ll have questions along the lines of:
What was your headcount plan?
What was your spending plan?
What was your ARR plan?
How many customers did you expect to have?
We covered the basics of creating an operating plan in To Plan or Not to Plan—What Every Founder Needs to Know.
Your Series A is going to be a dilutive event (you’re likely going to give up 20-25 percent of your company’s equity in exchange for the investment), so you have to be very clear about how much capital is necessary to get your business to the next stage. Think about the goals you want to achieve, on what timeline, and how much capital it will take to get there. And be ready to defend the numbers. If you’re asking for $15 million, and an investor asks, “Why not $50 million or $5 million?” be prepared with a good answer.
Your Customer References
At some point in the Series A process, investors are going to want to talk to some of your customers. Instead of just giving them a list of customers and their contact information, you should have a plan for this critical stage of the process. The last thing you want is investors randomly calling your customers. You probably have a handful to maybe a dozen key customers. Think through how you are going to manage this process with a similar number of investors in a way that won’t overwhelm any of your customers and that won’t shortchange certain investors. For example, you don’t want to send six VCs to Customer A and burn them out on talking with other investors. Take time in advance to match your customers to your investors so that no single customer is overwhelmed.
Next47’s Diligence List
So far, we’ve discussed a few of the big-picture things you’ll need to prepare as you embark on your Series A process, but there’s much more than that. Here at Next47, we have a diligence list that we provide to startups when we are in conversations about an early-stage round. Expect you may be asked for items like:
Income statement, balance sheet, cash flow statements
Excel financial model and projections
Historical sales quota results and planning
Headcount model and projections
ARR by customer by month (aka Customer Cube)
Pipeline snapshot showing individual opportunities, annual contract value, stage in pipeline, weighting
Chart showing pipeline progression over time (i.e., the historical amount in each stage each quarter)
Detailed cap table with share prices
Last term sheet
Any internal materials on the product roadmap, competitive landscape, deal win/loss reasons
List of patents
Last four board decks
Aim to have up-to-date copies of all these documents ready for your investors when they ask for them. While some investors may not ask for all of these items, it’s best to be prepared.
Clean Up Your Org
As you start to think about a deal that has the potential to make everyone excited—including you and the other founders, the fund that’s investing, and the existing investors—now’s a good time to clean up any organizational issues you know you need to resolve but have been putting off.
For instance, maybe someone led a small engineering team but isn’t the right person to lead a large engineering team and you’ll need to recruit someone who does.
This is an easy thing to clean up right now—before you share your materials with investors that don’t reflect that. But if you haven’t made the change, be sure to notify investors that you’re working to fix it. Investors won’t be shocked, and it shouldn’t be a high-stress moment for anyone unless you’re saying you want to do something drastic.
Intangibles
During the fundraising process with a venture firm, investors are simultaneously conducting due diligence on your company and selling you on their investment. It is important to be aware of this dynamic, as you are also simultaneously selling your company to investors and buying their capital.
Finally, be sure that you are personally in a good place when you engage in this process. It’s going to take some time, and it will likely soak up much of your available bandwidth. So, get your own life in order first. This means being physically and mentally prepared for the event, and making sure you have time to prioritize putting other things aside until you’ve closed your Series A. Because once you start, it’s off to the races.
Conclusion
Mastering a Series A funding round requires meticulous preparation, from crafting a compelling pitch that distinguishes your startup to devising a solid operating plan with clear goals and reasonable funding requests. Equally important is managing customer references effectively and ensuring your organization is streamlined and ready for investor scrutiny. Attention to these details will position you favorably in the eyes of potential investors, enhancing your chances of a successful Series A funding outcome.
