The Fundraising Checklist: Proof Points for Series A
Over the past decade we have observed strains of seeds and series. The financial landscape that has changed the rules of the game for founders is now higher. To give founders every chance to succeed, we are issuing a Series A checklist. Although it focuses on the first Series A fundraising, it applies to all initial fundraising stages.
Here’s what’s going on, and founders need to understand that the
Series A rounds are larger and occur later in the company’s lifecycle. Seed funds like NFX have also grown larger and more established to fill this gap and help companies in the early stages of formation. With the increase in the capital of each Serie A, the expectations of companies to increase Series A have increased. As the number of startups in various sectors increases, upgrading to Category A becomes increasingly difficult. For startups to overcome this increasingly difficult Series A hurdle, they must focus on their long-term vision while reaching immediate milestones.
Generally speaking, prerequisites for Series A funding are overall product-to-market fit and minimal size. But here are 13 additional pieces of evidence that investors are looking for in funding startups.
Show your longing
One of the most important things Series A investors look for is traction. Determining whether a company has support varies greatly from situation to situation, but a relatively small difference can make a huge difference even on a 12-month scale. Investors looking to see if they have RPM are looking for this hockey stick curve. A more linear trajectory is unattractive, and they want to see you approach an inflection point. When they invest, they want to see their investment as rocket fuel.
Prove Scalability & Unit Economics
At the series A stage and later, investors are looking for a clear path to growth and scale.
For scale, a minimum scale that investors are looking for is very company-specific. To find benchmarks it’s best to triangulate from peers and investor conversations.
Growth is showing that you have a path you can trust. In the seed phase, you’ll probably experiment with half a dozen channels. Usually, at this stage, you will double one or two with a well-understood strategy to gain some scale, such as product, marketing, or sales. It is important to clarify what are the means of growth and how they can be expanded in a profitable way.
One of the most important things investors are looking for is evidence of potential demand. This is a demand pipeline waiting for you to unlock when you can simply expand your offerings and services with more money. The more these terms can describe a funding application, the safer it is to find investors and make decisions.
Have a big vision (but it’s okay to start small)
As my partner Gigi Levy Weiss wrote in How VCs Think, the economic aspects of VCs ensure investors are looking for a really big exit early on. To create the top Series A, you need to be able to map the path to $ 100 million and, in some cases, $ 1 billion in sales. However, as we often say to portfolio companies, it’s a good idea to “find the centre of the incandescent lamp” and bleed from there to the adjacent market segment.
Start with a well-defined, well-understood, well-executed niche, but can show a bold, inspiring and epic vision.
Create a clear and compelling story
What is the reason for existence?
Why now? Why was that impossible until recently? Why is the world in need of your solution today?
For us, the timing of start up is everything. A compelling story begins by identifying a credible opportunity that has never been tried before. This represents an important open issue and provides a solution. Draw a picture of this problem-free world.
Build Out Your Team
A big signal to investors that you’re ready to move to the next stage is that you’ve been able to build out your team and plug gaps in the key areas where your founding team is deficient, in the form of either employees or advisors.
You want to be able to show an ability to hire and bring on talent from centers of excellence, whether it’s individuals from top universities, top companies, or just remarkable people that can benefit the critical early DNA of the company.
The investors you want to lead your next cycle need to realize that the best companies succeed only if they can build a diverse pool of talent. The later you quit this quest, the more difficult it becomes. So by the time you’re raising the Series A, you’ll be able to demonstrate your ability to hire people who bring perspectives, qualities, and experience far beyond those of the founding team. No one expected the United Nations, but a little thought beyond the warm-up period shows that the team is building a solid foundation.
Attracting top talent to places like this is a signal to investors that your business has real traction and that you can convince people with so many options to come work with you. When top talent is ready to enter your business, it is a reliable business base for investors. Remember to introduce and highlight your hires and their resumes.
Create a path for defence
The best investors want to support you when you can show why you are a portfolio leader in the most successful markets. This is what generates the best profits. Defense – especially network effects –
is the biggest driver of value creation, and investors know it.
For this reason, you need to show your investors a solid defensive strategy if you want them to be interested. You also need to show that you’re the leader of the genre or that you’re on the right track.
When it comes to deciding how much money to ask for at a fundraiser, it’s best to be careful. If you think you can hit a big round, set your expectations a little lower and let the competition raise the numbers. Nothing attracts VC FOMO like an oversubscribed ride, and the best VCs are always willing to put extra money to work.
When fundraising, be transparent about your fundraising schedule to help create a sense of urgency and scarcity. It is best not to mention the names of other VCs, but to indicate that you will make a decision within a certain time frame, allow all your investors to participate and, if necessary, spend time for their due diligence process.
Build VC Relationships Early
You don’t want your first touchpoint with a VC you’re looking to raise from to come right before you’re looking to raise. Ideally start VC relationships 6+ months in advance of raising to maximize your chances of getting the ones you want. This is important for founders to find the right partner for this journey and also for investors to get to know the company.
As a benchmark, you can hope to get on average 1 term sheet for every 20+ introductions. So in building your relationships, identify why the VC is right for you and express that to them. Be prepared to follow up quickly and provide detailed answers to your questions day and night.
As an additional buffer, you should aim to liquidate Series A when you have more than 6 months of cash on your balance sheet.
A proven way to attract investors’ attention is to make progress, whether it’s business performance, hiring, PR, or marketing. We want to show that our business is accelerating in every possible way means managing and exceeding expectations. If you said you were expecting 15% growth next month, but you have a meeting that comes back expecting 20% growth, it’s a lot more fun than setting and meeting your 20% growth expectations.
A common mistake I make with founders is that they sell too much at the first meeting. “Next month you sign a big deal X, your income is Y, and so on.” Most of the time things don’t go as planned.
In contrast, from an investor’s point of view, nothing is more exciting than hearing from the founders that the business is getting better with every interaction.
Find a “minimum viable future vision” that works for your expectations, then consistently exceed those expectations to create a sense of acceleration. The more you exceed expectations and show momentum, the more people, both investors and employees, will be inspired by your company.
Climb the stairs of evidence
Venture capitalists have a mental structure called a ladder of evidence that helps them evaluate startups based on groups of predictors.
No matter what proof “step” you take in the last round of funding, moving up to a higher level is a good sign for venture capitalists that progress is being made. This is a sign that everything is ok.
Moving in the right direction on the right track. If you’ve been able to turn a customer waitlist into active users, for example, that’s a good sign.
Make a World-Class Pitch Deck
For your seed pitch, the design and data presentation in your pitch deck aren’t always difference makers. But when you’re pitching for your series A, having world-class design and data makes a difference.
Make your decks look simple and awesome. Have lots of data available in an appendix or within the deck. You want to leave an impression of your outstanding knowledge, analysis, and insight.
Construct Social Proof
Social evidence is one more significant sign that most financial backers focus on. However much you can, welcome on top consultants, powerhouses, and heavenly messengers into your circle to acquire social verification, and ensure you grandstand them.
It additionally assists with getting the most ideal introductions, and in a perfect world you need to observe various introductions to similar financial backer from individuals who know your organization. Finally, it’s essential to feature supports from top clients, colleagues, press stories, and different sources.