A few years ago I wrote The Founder’s Guide To Selling Your Company that was pretty well received by the startup community.
I’ve recently been getting a lot of questions about raising a Series A round.
Genesis for this article:
I’ve advised lots of companies I have invested in through Y Combinator and personally through the venture fundraising process.
Having pitched over 100 investors and successfully raised ~$100mm in venture stage financing,
I want to share the lessons I’ve learned with founders who are new to this process.
For my most recent company, Atrium LTS, we raised a $10.5mm Series A let by General Catalyst, with participation from NEA, Greylock, Founders Fund, Thrive, Shasta and many more investors.
When are you ready to raise a Series A?
The snide answer is that you are ready to raise an A when you can convince a VC to give you a term sheet. The more nuanced answer is when you have achieved compelling enough intermediate milestones that convince VCs that cash is your constraint to scaling your business.
In other words, you have something that works, and all it takes is pouring money on it to grow it much, much bigger.
For a couple reasons, I am actually not going to outline what those actual milestones are.
First, they are different depending on what industry you are in (are you a SaaS company? consumer? autonomous cars?), and I am not an expert in every industry.
Second, the goalposts are always moving.
Third, those milestones are modulated by other facts about your company (did you compile an amazing team? are you really good at telling your story?). If you want to figure out what milestones you probably need to get to raise a Series A, you are best off looking at the metrics of other companies in your space that have recently raised, possibly by just asking the founders.
A note on VC economics that has been written about to death, but bears repeating: VCs do not want to invest in businesses that are creating steady revenue, growing 20% a year.
The fund model is such that they are incentivized to want to invest in businesses that can be worth 1, 10 or 100 billion dollars and in a single stroke return multiples of their fund. This is not a moral judgement, this is structural to the venture funds. If you have a linearly growing business venture capital is probably not a good fit for you.
How is raising a Series A different from raising a seed round?
The process for raising money in a seed round and an A round may seem superficially similar, but there are significant differences that are worth highlighting. Many founders expect that because they raised a seed round (perhaps even a very large one) they know what the A process is like. Here are the important differences:
- Seed round paperwork is much simpler. Investors will invest in convertible notes and SAFEs with very simple terms.
- Because of this, in the seed you can raise money incrementally, which makes it easier to build momentum. As soon as you convince an investor to invest, you can have them sign a SAFE and then get them to wire the money, and then for your next investor you have that much more progress towards collecting all the investment you need. In the Series A, you need to convince an investor to lead your round, which is a much higher hurdle to get over.
- Also, it will take a lot longer to close a Series A (1–3 months) than a seed round (as fast as you can meet investors).
Simple 3-part narrative to fundraising
The first thing to do once you’ve decided you are ready to raise an A is to put together a compelling narrative.
I specifically start with a narrative and not a pitch deck.
I firmly believe that investors invest in (and employees join, and journalists write about) compelling stories, and your pitch deck is really just a vehicle for telling the story you want to tell. So, start first with the narrative and build the deck after you have it nailed.
The best advice I ever got on narratives was from Slava Akhmechet of RethinkDB on a matter totally unrelated to raising money. He said that every story in human history followed the same arc:
- The world is a certain way
- Something changes
- The world is now different
This may seem obvious to you, but I love the simplicity of it. I bet you that any story you can think of right now follows this outline. Like every narrative, your pitch will follow the same arc.
The world is a certain way — Here you outline your background and the current state of the market: How you were introduced to the problem and why you are an expert, The order of magnitude of the problem today (it should be big!)
Something changes — Your solution to the problem and why now is the ideal time for it
The world is now different — aka How your solution changed the world: Product traction (especially metrics / milestone focused traction), The remaining opportunity (or why your traction will continue and make you big!)
Your narrative must be concise and accessible. Anything that doesn’t powerfully support one of these points I would leave out.
I view this narrative as a story you tell through conversation. If you have a powerful narrative you should be able to have a conversation with someone who is a novice at your industry and guide them through it, and at the end they should think your company is amazing and probably going to be very successful. In fact, to refine my narrative I often do exactly this (it doesn’t have to be with potential investors) and use it to iterate the story I am telling (adding or removing specific facts, changing ordering, etc). Getting the right narrative is the most important part of the pitch process, so I would make sure you spend a lot of time perfecting.
Many (or most) of the investors you talk to will be less knowledgeable about your industry than you are. You will have to explain things simply. You can often do this by walking them through real world examples of the what would happen without your product, and what happens with your product (hopefully the latter is much better).
You should pitch the biggest vision that you actually believe in. VCs are trying to find multibillion dollar companies. You want to present what you are building as something that is going to be big. However, it has to be a vision you actually believe: if you pitch something that you don’t actually believe will happen just because you think it sounds big, it will be apparent and investors won’t want to back you.
Your pitch deck
Once you believe you have a powerful narrative, you can make a pitch deck. Your pitch deck should follow the major points of your narrative as we outlined above.
Leave all the extraneous details (competitive analysis, deep dives into your P&L, etc) for the appendix. Those aren’t core to telling your narrative, and you will only have to refer to them if an investor is really digging in and asking in depth questions.
Resist the urge to put clip art, stock photos, and other random graphics into your pitch deck. It’s not helping you convince people you are building a great company. A powerful story and solid metrics do that.
Practice makes perfect
The next step is to practice your pitch. Many founders I have worked with just practice by lining up one or two second tier firms as their first meetings, but I think that is a mistake. Pitching your company is a skill, and like any skill, a lot of practice is necessary to truly become a master. I don’t believe I had my Atrium LTS pitch nailed until around 80 presentations in.
You probably don’t need to practice 80 times, but the point is that there is a lot of skill building to do and more practice will help you with the following things:
The more you practice, the more confident you will be.
The more confident you appear, the more people will believe the things you are saying. This is how human nature works. If you appear nervous, you will not seem like an expert (even if you are).
The more you practice, the more objections and questions you will uncover.
You can then think of and prepare answers to these objections and questions. Eventually, you will know everything anyone will bring up before they bring it up. When you have a solid, well-reasoned answer, they will be impressed. The alternative is being blindsided by an objection you don’t have an answer to, and looking like you are unprepared.
The more you practice, the more you will know your numbers.
You absolutely want to know all the metrics surrounding your business like the back of your hand. If someone asks you what your customer acquisition cost is, and you can tell them the % breakdown of which channels you are getting customers from and the cost in each channel, you will look like a top notch operator.
Practice will help you define your pitching style.
Everyone has their own style. Some people are aggressively confident. Other people are more introspective and thoughtful. You should do what works for you. The commonality is that whatever your style is, you need to be confident about your narrative and your metrics.
How to practice your pitch
I don’t think you only have to practice with potential investors. You can practice it with your friends who are founders, potential angels who might want to participate in a Series A round (but are low risk because they aren’t likely to lead), or even just potential employees or partners in the industry. The point is to get reps.
Setting up Investor meetings
The next step is to make a list of potential VC investors. I go into detail on this on our guide to getting VC introductions.
Founders are divided on this, but my opinion is that most founders should go wider and talk to 10–20 partners (some people think you should talk to only the few, best investors in your space).
My reasoning is that:
- You can use the people you want to raise from least as additional practice
- Having a bad or neutral option is better than having no option, and the way to maximize the chance of that is by increasing your funnel.
In order to generate your list, make a list of specific partners of VC firms by looking at the industry they invest in (you want people who invest in your industry). Figure out who can you can get warm intros from. Usually you can get these warm intros from your existing investors, advisors, accelerator, or friends who are in the industry.
Don’t go to your existing investors and just ask “do you know any investors?” Yes, they do know investors, but keeping a mapping of every investor out there to every industry is impossible, so they are unlikely to know off the top of their heads who they should intro you to. It is far easier to go with a prepared list of identified targets and see who your investor can help with an intro to.
Once you have a list of investors and contacts who can give you a warm intro to each, you are ready to start the fundraising process.
The Series A Fundraising Process
The fundraising process is as follows:
- Set up initial meetings with individual VC partners
- If you are successful at exciting those individuals, they schedule a meeting with multiple partners of theirs
- If you are successful at convincing those partners you are a great opportunity, they schedule a meeting with the whole partnership
- You come in during a partner meeting for an hour and pitch the full partnership
- If you successfully convince the partnership, they give you a term sheet
- You negotiate, choose a partner, and sign the term sheet
- Diligence ensues
- Money is introduced to bank account
- We will review these steps in detail.
1. Setting up initial meetings
A little bit on meeting theory: you want to line up all your initial VC meetings within the same 1 to 2 week period. To do this, you should ask your contacts for introductions all at the same time.
The goal here is to keep all your potential investors at the same point in the process as much as possible. This is so that if you do get a term sheet from one investor you can use it as leverage with your other potential investors to get more term sheets. The idea here is to create as much of a market for equity in your company as possible, and the best way to create a market is to always have as many potential buyers around at the same time.
Lots of founders make a mistake here and meet with VCs linearly, because they don’t take a systematic approach to fundraising. This is a problem for two reasons:
It is very distracting for you as an operator, because you are always spending a lot of mental energy on thinking about fundraising.
If you do get a term sheet from one investor, it is hard to parlay into other term sheets, because you won’t have other investors on the verge of wanting to invest in you. Also, when you have one term sheet you will be tempted to accept it and your leverage to negotiate will be much lower.
Now, because VCs are often on vacation (or attending conferences, another form of pseudo-work vacation), it can be hard to schedule all of them for the same time. You should avoid major holidays (like the months of August or December), and also try to schedule meetings for 4 weeks out, giving lots of lead time (and therefore clearer calendars) for you to get a meeting the specific week you want.
Some of the investors might want a deck before meeting. Feel free to send them the deck.
2. First meeting
Now you have lined up a bunch of meetings with VCs who you have specifically identified as people you want to raise money from (because of their experience, past investments, brand, etc).
The goal of the first meeting is to get them excited about investing in your company (really that’s the goal of every meeting). Personally I prefer to have a conversation without the deck, but some investors might want to walk through your deck. The important point here is that you need to get a conversation going that roughly follows your narrative. This is where all the time you spent practicing will pay dividends.
If they interrupt you with questions and their own thoughts on how you should build your business, that is good. If they have no questions or are browsing Facebook on their phone, that is bad. You will probably have some idea at the end of the meeting whether it went well and he or she was interested.
3. Multiple partner meetings
If you did a good job of pitching and your business was interesting to the individual partner, he or she will email you within 24–48 hours to set up a next meeting. As a general rule of thumb, if you don’t hear from a firm for longer than 48 hours they are not interested. There will be a sense of urgency if they are interested, otherwise there will often be radio silence. Getting you through the process is a priority when making investments, but telling you no is not a priority.
Your next meeting will generally be with the partner you talked to and one to three other partners from the firm. The point of this meeting is for your main partner to get other opinions and feedback on your business. You should expect to have a similar conversation where you walk through your narrative and are prepared to answer detailed questions about your business and its metrics.
If the partners you meet with are excited, they will email you to schedule a meeting with their full partnership.
If they aren’t sure, or aren’t as excited, there may be intermediate steps. Often they will want to schedule additional meetings with several partners or industry experts who are close to the firm. This is often where deals peter out and lose momentum.
4. Full partner meeting
The partner meeting is the final step to getting a term sheet from a VC. Usually this will happen on a Monday (when most firms have their day of partner meetings).
The format of your partner meeting is pretty simple. You come in, set up your deck on the projector, and then get an hour to walk the partnership through your narrative and deck. They will interrupt with questions. Like all VC meetings, if they aren’t asking questions, that is a sign of disinterest. After an hour, you leave. I’ve personally never understood why firms don’t allocate more than an hour as often they seem to still have more questions at the end of the meetings, but that’s how it works.
It is simple to prepare for your partner meeting. You should schedule a meeting with the partner who is championing your deal, walk him through your deck, and specifically ask what objections his partners are going to bring up and what their biggest concerns are. Then, go home and make sure you have 100% rock solid answers to those questions and objections, and make sure your narrative encompasses the vision that they are excited about (if their vision is too far afield of what you are building, perhaps that is a sign they aren’t the right fit).
The partner meeting itself can be very intimidating. After all, here are a bunch of people who have funded multi-billion dollar companies, have way more experience investing than you do, and are probably worth a lot more money than you are!
Relax, and trust your narrative and mastery of your own business to speak for itself.
If you do well during the partner meeting, you will get an email or call or text from your sponsoring partner asking to talk soon. By this time you probably know what no text means.
When you talk to them on the phone, they will say something like “we love your vision, think this can be a great company, and want to be your long term partners in this business.” Then they will give you a term sheet that outlines the major terms of their proposed investment, things like amount invested, valuation and board control. It was also have a no-shop exclusivity period, after signing it you will be prevented for some period of time from soliciting other investors.
You don’t have to sign it immediately and I would recommend that you do not. At this point, if you don’t have a lawyer, you should find one, and it should be someone who has experience with Silicon Valley deals.
Here it becomes clear why it is important to have your other potential investors at the same part of the funnel. If you do, you can immediately call the other potential investors, and tell them that you have a term sheet from someone (don’t say who), and put pressure on them to give you a term sheet. Effectively what you are doing here is creating a market for equity in your company, and having options will help you drive the best deal.
Before you sign a term sheet with anyone, you should ask for references from companies they have already funded. Remember that this is a person involved in your company that you can’t fire, so you had better pick wisely. Pick a partner that you actually want to see; someone who you want to get feedback on your business from.
6. Diligence and close
Once you sign a term sheet, you now lose all leverage. Any momentum that you had during your fundraising process will be hard to pick back up if for some reason this deal falls apart (investors, like most people, have relatively short attention spans). Expect to spend two to six weeks in diligence.
7. Get money
That probably 1) took longer than you thought and 2) was more of a pain in the ass than you’d anticipated. Remember than when you are spending the money — you probably want to make sure the next time you go out to fundraise (if ever), you have as much leverage as possible (i.e. your business is doing awesome). If you are spending the money on something that doesn’t make your business much better, consider not spending it on that thing.
Fundraising is not a goal, it is a tool for building your business. You should use that tool when you need capital to grow your business. Participating in the Silicon Valley beauty contest of who raised what at what valuation is a fool’s errand. There are lots of examples of companies raising too much money from the wrong partner and ending up shooting themselves in the foot.
Used well, raising money from the right VC can bring needed capital into your business to refine your model and grow. You can also find the right long term partner who will continue to back you even when things might not be going exactly according to plan. A well run fundraising process can help you find this partner.
Godspeed and good luck!
Atrium Academy is accepting applications for founders on how to raise venture financing — Apply here.