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What are investors looking for? How can you stand out in the crowd by starting and securing the venture capital financing you need to scale given the stiff competition?
A1/3 There isn’t a hard and fast rule for this: VCs are different and different metrics apply to different sectors. #smallbiz_expert
— David Ehrenberg (@EarlyGrowthFS) August 3, 2015
Below I outline what you need to come to the table with to complete your first institutional round.
The Way to Series A
While it’s possible to land seed funding with just a great business plan and a product mock-up, you’ll have to do much more than that to clinch a Series A financing deal.
For one thing, you’ll be dealing with institutional investors at this stage. Since they aren’t investing their own money (i.e., they are investing on behalf of their limited partners), and the sums at stake are large (the average size of a Series A round now ranges from $5 million to $15 million), these investors are a lot more discerning in terms of balancing risks versus potential rewards. In other words, this is where the rubber meets the road.
You might have a leg up depending on whether or not your seed investors decide to re-invest, but that isn’t a given.
Your Key Metrics: What You Need to Show for Series A
A rounds are not for proof of concept. At this stage, you’ll need to:
- Demonstrate traction on revenues
- Show evidence of customer success (user numbers, subscriptions, average customer value, etc.)
- Potential — institutional investors fund companies with high growth rates and an evident path to generate significant revenue in the future
Other than the ones listed above, the key metrics that drive your startup success will be specific to your industry. Know what those are and how you stack up against them. Make sure you know your numbers: historical, current, and projected, cold and that you can justify the underlying assumptions in your financial model.
@Wagepoint A1/4 Build financial projections from the bottom up: http://t.co/CkZcD5h3do by creating detailed spending plans #smallbiz_expert
— David Ehrenberg (@EarlyGrowthFS) August 3, 2015
Your Momentum Towards Series A Funding
- You’ve found product/market fit
- You have the right systems and infrastructure in place to scale your startup
- You have interest from other investors — not a requirement, but it definitely ups your odds (follow-on commitments from your early investors send a powerful signal)
Your Team
Once institutional investors come in they often make changes to the management team because the skills needed to move from idea to launch are very different from those needed to transition from early traction to the growth stage.
In addition, you’ll have a formal board to answer to.
Now’s the time to critically assess the strength of your team including:
- Do the people on your management team have proven track records and/or industry experience?
- Are they the right players to successfully execute the next stage of your startup development?
- What critical skill gaps exist in your business?
Milestone Funding
One final point: always practice milestone funding.
That means figuring out how much you need to raise to achieve what milestones and only raise that amount.
If you hit those targets, you’ll be setting yourself up for a big bump up in valuation when it comes time to raise your B round.
Get the entire story in our #smallbiz_expert Twitter interview w/ David!
This blog post is brought to you by David Ehrenberg, Founder of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support.
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