Series A Fundraising Best Practices, Part 1
The careful selection of investors, pitch preparation and practice, and the careful scheduling of funding round are three best practices that founders and startups in the United States should follow when raising Series A money. Details as to how these best practices should be carried out are provided below.
Careful Selection of Investors
- A number of experts highlight the importance of this practice.
- Y Combinator, a California-based startup accelerator, is running a Series A program to share its learnings about Series A funding rounds. In 2018 alone, it was able to help Y Combinator companies raise a total of more than $945 million across 95 Series A funding rounds, a 71% increase in amount raised and a 50% increase in the number of funding rounds relative to 2017. This accomplishment makes Y Combinator a reliable source for Series A fundraising best practices.
- According to Aaron Harris, a partner at Y Combinator, the best investors or partners are the ones capable of making quick, high-conviction decisions. They do not hold off to know what other investors are thinking or doing.
- They quickly respond to questions and follow up from meetings. They have a clear idea of the things they like and do not like.
- Harris advises founders to start with a pool of 15-20 investors and work their way through this pool before the actual round until they find the right investors. They should not share too much information, however, that these investors can already make a decision before fundraising even starts. The timeline for fundraising should be clearly communicated to these chosen investors.
- Dave Bailey, a serial founder and angel investor who writes for California-based publishing network Medium, says it is wise for founders to start with their seed investors first. Founders should ask their seed investors if they will invest and how much they will invest. An unwillingness among seed investors to participate in Series A could be a bad sign.
- Bailey also highlights the importance of starting with investors who have a history of leading funding rounds. Some investors prefer to lead rounds, while some investors tend to just follow lead investors. Followers typically use a ‘wait and see’ approach, so they tend to participate only when there is already a lead investor.
- Tim Eades, chief executive officer of California-based startup vArmour, has already successfully raised Series A money. For his startup's Series A fundraising, he worked to narrow down his list of potential investors to his top five targets.
- Ross Schibler, who have founded three Slicon Valley startups and have extensive Series A fundraising experience, says that when selecting investors, startups should focus on the question "Do I want to work with this partner and will they help me build a great company?"
Pitch Preparation and Practice
- Three individuals with extensive Series A fundraising experience highlight the importance of preparation when it comes to pitching.
- Practice makes perfect. Harris of Y Combinator highlights the value of pitch practice for founders seeking Series A funding.
- The pitch deck should be mobile-friendly because, according to Bailey, investors check email messages on their mobile phone 95% of the time. It should be “as clear, concise, and compelling as possible."
- It is crucial for a founder to thoroughly know the investor he or she is speaking with. He or she should learn beforehand the investor’s recent investments, network, job history, and personal interests. It will be easier for a founder to establish a human connection if he or she has this knowledge.
- Use of storytelling techniques is advised as they have the ability to transform a pitch from a mere recitation of facts to an effective and compelling presentation.
- The pitch should demonstrate traction and include a clear description of the problem being addressed, the vision, the business metrics being used, the bottom-up market size, the reasons for fundraising, and the efforts being made to reduce risks.
- According to Pete Flint, managing partner at California-based early-stage venture firm NFX, investors expect a month-on-month growth rate of at least 10% and at least six months of consistent monthly growth.
- A one-sentence description of the company, similar to Uber’s “Tap a button, get a ride,” should be prepared. This one-sentence description will make it easier for investors to remember and talk about the company.
Careful Scheduling of Funding Round
- Three individuals, who are all knowledgeable in the area of Series A fundraising, point to the importance of timing fundraising wisely.
- Dave Bailey says that founders seeking Series A funding should time fundraising in a way that they are able to leverage spikes in revenue or usage and that they do not run out of money during the funding round.
- Founders with fewer than six months’ worth of money should either control costs or boost revenues. Raising Series A money could be quite a lengthy process, and running out of money in the middle of such a process could turn off investors.
- For startups with seasonal spikes in revenue or usage, it is important to time fundraising in a way that takes advantage of the momentum or upward trend in sales or usage. Bailey advises that founders play to their seasonality.
- Investors are attracted to startups that are capable of exceeding expectations. A startup that projects a 15% growth rate the following month and returns with a 20% growth rate is more attractive than a startup that just meets expectations.
- Bailey does not recommend raising funds during the Christmas holidays and the summer because investors flying to their holiday homes could make fundraising slower than necessary.
- Harris of Y Combinator advises founders to create a dynamic where “investors are forced to operate in parallel.” Each batch of pitches should, as much as possible, take place within a tight timeframe, say, a period of one to two weeks.
- Founders can tilt the environment or market to their advantage by setting the same starting point for a big set of investors. Doing so would prevent information from spreading too quickly through the investor network, prompt investors to decide and act without looking at other investors, and build a competitive dynamic among investors.
- Eades of vArmour advises founders seeking Series A funding to set a timeline of approximately five to six months.