seed to series A

Emil Gigov talks about what can be done to maximise your chances of raising series A funding

by Emil Gigov

So, you have recently raised a seed round for your tech start up and you and your co-founders and early employees are excited about the prospects for the future.You are one step closer to making your start up a big success and reaping the rewards from it. Of course, you have every right to be excited but you should also be cautious and start planning early for the next steps in your journey. Research from CB Insights shows that in the US less than 50% of companies receiving Seed capital go on to raise a further round of funding. Research by Dealroom on European VC funding during the period 2012-2018 shows that only 19% of European companies which received a Seed round went on to raise Series A funding in the following 3 years. With this in mind, what can you do to increase your chances of success? 

Let’s first take a look at what you have to achieve to attract Series A investors. You probably have 12 -18 months cash runway and there is lots to do, so where should you focus? This commentary is focused on SaaS businesses but much of it is applies to other technology stat-ups. 

Product-market fit

You should be able to demonstrate product market fit with meaningful traction. You should be able to show clearly what the repeatable use cases are for your product. Traction and top line growth are key as without them you have practically no chance to raise an A round. For a business with revenues of £1m ARR, growth should be 150% to 200% or better. If you are more advanced and making £3m ARR, growth should be 100% or better.

Prove the business model and unit economics

You should be able to demonstrate the ROI a customer will achieve from using the product and show the profit (before sales costs) that each additional customer will contribute to the business

Marketing Strategy

Your go to market strategy may still be evolving, but at least one channel should have enough evidence of scalability (as measured by LTV/CAC). You should understand well the buyer journey and have a good grip on sale cycles, pipeline conversion rates and win rate against your competitors. If you are not already tracking these measures by the time you’ve raised your seed round, don’t delay as you will be expected to show historic metrics by your Series A prospective investors (more importantly, this will also help you run the business).

Sufficient evidence of renewals and low churn

Churn is a real area of focus at the A and later rounds. Ideally your net revenue churn should be positive but you can get away with single digit percentage gross annual churn. If your churn is over 10%, you have a problem. An investor will be looking at a cohort analysis, so you need a meaningful number of customers to renew to provide the right level of confidence. 

Evidence that you can recruit high calibre people

This is a function of the quality of your company and business idea but also how well connected you are in the market place and your ability to lead a team. The culture of the business would have a big impact on recruitment and staff retention and investors will be looking at Glassdoor reviews as well as other signals to confirm whether you can attract the right talent. There is mounting evidence that culture is fundamental to the success of a start up (see Albion’s research on this topic)

The benchmark SaaS metrics have been discussed many times, including in this post by my colleague Ed Lascelles. Take a closer look if you need more details on what to measure and how. You should also be prepared for a more rigorous due diligence exercise than at the seed stage (see an earlier post on the value of due diligence)

Making sure the business is firing on all cylinders and delivering on all the above is a big challenge and will take all of your working hours. However, you will not succeed unless you also start thinking about your next funding round and begin to cultivate the right relationships with Series A VCs. Ideally, you should start taking to VCs at least 9 months before you need to close the round and preferably 12 months before. You will increase your chances of success if you allow time for the VCs to get to know your business and follow your progress over a few months, allowing you to build your credibility and the investor to build their confidence in the business. Your Seed investors, whether Seed stage VC funds or angels, should be able to introduce you to the right Series A investors and this should be a key criteria in how you choose your seed investors. In any event, my strong advice is to seek a personal introduction if you want to stand out from the hundreds of other companies knocking on the VC’s door. 

The second reason why you should start the getting to know you process well in advance is to ensure you choose the right Series A investor for you and your business. I’ve set out below some considerations on how to determine if an investor is right and I would strongly recommend you seek to optimise for investor fit rather than optimise for valuation at this stage. Of course, valuation is important but as long as it is within reasonable parameters, it should not be the key factor in your selection process. 

Business builders v financial structuring experts (VC v growth investors) 

VCs investing predominantly in later stage companies will put an increasing focus on financial structuring at the expense of their business building expertise. If you are raising Series A, it is likely you still need a lot of help from your investors on building the business, so VCs with a main focus on A rounds and Late Seed would be better placed to contribute. This could be in the form of direct advice or by introducing you to trusted and proven advisers who can work with you. One of the most valuable resources is access to other portfolio companies and entrepreneurs, many of whom would have tackled the issues you are facing. You should establish whether the VC has a large enough portfolio relevant to your business and if they encourage cooperation and knowledge sharing within their portfolio. 

Significance of deal to the fund 

If the fund’s usual cheque size is £10-30m, a £3m investment would not get much of their time. You may find that their initial interest wanes rapidly as the next exciting deal comes along. Ask yourself whether the VC will help you if things go off plan, or will they abandon you? Better still, do your research and ask some of their less successful portfolio companies. The accepted wisdom in VC investment is that the majority of investments will fail and the VC should focus on the successful ones. However, the successful companies usually don’t need the VC’s help, those that have hit a rough patch do. 

Working on a personal level

Last but not least, can you work with the VC on a personal level? If you are embarking on a 5 or 7 year journey this is really important to get right. To figure it out, you have to spend some time with the potential investors,hence engage early and have regular check-ins with them. 

One of the most important questions for a founder is how much money to raise at what stage

The temptation and the accepted wisdom is to raise just enough to last you another 18 months so as to minimise dilution. However, if you can raise additional funding and extend the runway by 6 months or so, you should do so. This will give you more breathing space, allow you to take action to correct any metrics that are not on the right trend line (e.g. growth trends are rarely a straight line) and let you work more on the business before you fundraise again for the next phase of growth. I’ve often come across situations where founders wished they had raised more money, and rarely when they’ve raised too much. 

AlbionVC is a Series A investor but we have the flexibility to invest in Late Seed rounds for the right opportunity. In the past two years we participated in a number of Seed rounds which then successfully raised A rounds and B rounds led by external investors. For example Quantexa, which provides customer insight, anti-money laundering, fraud and credit risk solutions for financial services providers, raised $20m in 2018, led by Dawn Capital, following a seed investment from Albion in 2017. Koru Kids, which provides a platform for finding and managing childcare, raised a £10m round in 2019 led by Atomico, following a seed round from Albion the previous year. In both cases Albion worked with management to find the right investment partner and participated in the later rounds.