June 29, 2021
This doc is meant to provide some high level insights and direction to Seed companies as they begin preparing for their Series A. Metrics for Series A rounds are much less clear than they used to be and different investors have different frameworks for evaluating Series A opportunities. That said, there are signals that every Series A investor is looking for. Knowing these signals can help you know when to begin fundraising and how best to prepare for investor conversations.
The information in this doc is based on what I’m seeing across our portfolio at Scribble as well as conversations with dozens of Series A investors. There is also a lot of great content already out there on this subject — Unusual Ventures, Pear, First Round, and Scale are several firms that have written helpful resources. I linked those articles as well as a few others at the bottom of this doc.
Ok, now let’s get into it!
What should you focus on after closing your Seed?
The goal of the Seed phase is to begin showing signs of Product-Market Fit (PMF).
In addition to demonstrating PMF, other key goals during the Seed phase are:
Begin building your core team. The positions for your core team depend a little on what type of company you are. However, typically this includes senior technical, product and go-to-market talent.
Delivering v1 of your product and developing a roadmap for v2 based on learnings from the initial version and your longer-term vision.
Moving away from solely founder-led sales. To be clear, founder-led sales may always be a part of your sales strategy (e.g. for landing large enterprise customers), but the key here is that the founder should not be participating in every sales cycle — that others can manage a complete sale cycle indicates that scaling is possible.
Although you certainly want to be growing during the Seed phase (ideally >3x YoY), it’s not all about top-line growth. It’s just as important to begin showing you have PMF and establishing a scalable sales process. Series A investors will want to understand whether the progress a company sees at the Seed phase is repeatable long-term. Some ways to think about this include:
If we hire 1 AE, we will close $XX of new business in 6 months.
If we spend $XX on ads, we will get XX new users (or maybe no ad-spend is needed…even better!).
In other words, focus on building a “growth engine” and be able to measure “growth engine” efficiency using performance data, which we’ll get into more later on.
When should you start raising your Series A?
The goal of the Series A phase is to scale GTM efforts and accelerate revenue based on demonstrated PMF; i.e. pouring gas into an engine that has been shown to work.
The signals to know if you’re at this stage are very broad, but below are some points of reference:
For enterprise companies:
Revenue: It could vary from a couple hundred thousand dollars of ARR all the way to $2M (it used to be more clear, around $1M).
Customers: Ideally, you want to have a mix of a few six-figure customers and small-mid size customers (i.e. you’re not looking for one or two large elephants). This demonstrates repeatability and flexibility of your early GTM strategy. Your Series A investors are likely going to call some of your customers (which probably didn’t happen during your Seed fundraise). Having several strong customer references to provide prospective/serious investors is a milestone in and of itself.
Growth: Growing 3x YoY, which implies sustained ~10% MoM growth with >120% Weighted Net Dollar Retention.
Efficiency: If a sales-led model, you want to see good sales rep efficiency — quota should be ~4–6x their OTE salary and they should be hitting a large portion of it (80%+)
For consumer marketplace companies, you ideally want to be between $2–10M in annualized GMV. This is obviously a big range — your Series A round size will vary based on the traction.
For consumer subscription companies, it varies a lot but ideally you have >$1M ARR.
For consumer social companies, it’s more about DAU/MAU (>50% is best in class, >30% is good) and retention D1, D7, D30 (varies a lot depending on the behavior / actual utility of the app — e.g., it’s different for a game vs a social network vs prosumer tool).
What should you emphasize in your Series A conversations?
Once you’ve decided you are ready to begin your Series A fundraise, you’ll want to prepare and practice your pitch. Series A investors are going to be looking at some basic questions that were initially posed at the Seed:
Can the founder sell the vision effectively? A Seed founder theoretically may not have fundraised before, but a Series A founder should know how to command investor attention, conduct a pitch, answer questions, and ultimately demonstrate that they have a $10B business in the making. You would be surprised how many Series A founders cannot do this. Get a speaking coach! Practice your pitch in front of a mirror! The most common reason I’ve heard firms say they pass at the A is because the founder isn’t ready for “prime time.” Series A investors want to be sure that the CEO is a “fundraiser” and can effectively build/scale a team.
Has the founder gained a unique insight? Series A founders should know some earned secret about the business that they didn’t understand/expect/realize at the time of the Seed. Have you realized you need more salespeople? Have you realized that Instagram is the best channel for marketing your app? Series A investors are looking for something that indicates that the founder is paying attention to their business, not just along for the ride.
Is there early indication of PMF? As already mentioned, what PMF looks like is hard to say and varies for everyone. At the Series A, companies should be able to at least show early signs of finding PMF. And the founder should be able to point to at least 2–3 data stories (e.g. CAC is low but LTV is high) that suggest the presence of PMF.
At the Series A, you will have more data than you had at the Seed so Series A investors will want to see that data to support your answers to these questions. Below is more detail around metrics that Series A investors care about. Note that not all investors will care about all of these metrics, but they will likely care about at least some of them.
LTV:CAC ratio measures the relationship between the lifetime value of a customer (LTV), and the cost of acquiring that customer (CAC). It is a signal of customer profitability, and of sales and marketing efficiency. You should be shooting for LTV/CAC>3 at least. For consumer businesses, many investors are happy if it’s 2–3; but for enterprise SaaS, most investors are usually looking >5. To calculate your CAC, divide your sales and marketing costs for a given period by the number of customers you picked up during that period.
Payback period is how long it takes to recover CAC. At the early stages, it’s sometimes hard to calculate LTV. Therefore, some investors prefer to look at the payback period. Most early-stage startups will have collected concrete data around payback periods for customer acquisition (versus 3, 5 or 7 years needed for LTV observations). You should be shooting to recover CAC as fast as possible, typically within 5–12 months. To calculate payback, take your sales and marketing expenses in Period / (net new MRR or ARR acquired in Period * gross margin).
Sales Efficiency (SE) tells you how efficiently your company creates value. It does this by comparing new revenue for a given period to what was spent on Sales & Marketing in the same period. You should be shooting for SE>1.
Magic Number is another way to measure sales efficiency, but for B2B companies. There is often a lag between sales and marketing efforts versus when revenue actually shows up. This metric aims to capture that relationship by comparing new revenue in a given quarter and sales and marketing efforts from previous quarters. To calculate it, take the change in subscription revenue between two quarters, annualize it by multiplying it by four, then divide the result by your sales and marketing spend for the earlier of the two quarters. Ideally, you should be shooting for >1x but anything >0.5x is still solid.
Quota attainment tells you whether the team is hitting what it needs to and how you forecast that going forward. Arguably most importantly, investors will want to understand whether multiple individuals can hit goals or if the team is carried by 1–2 people.
There is no one recipe for a successful Series A. Although that may make it harder to know when to go out too fundraise, it also can make it easier to tell the story YOU want to tell. The key in this climate is to:
Not be overconfident when you go out to fundraise. Just because your friend whose startup is seemingly in a smaller market with less traction and a weaker product raised $20M at $100M valuation doesn’t necessarily mean you will be able to do the same!
Clearly articulate why your company will eventually be worth $10B and why you/your team are the best people to make that happen.
Use data and metrics to support your story. Most investors will focus on many of the same questions that were initially posed at the Seed. However, unlike when they were asked at the Seed, you now have data. Investors will want to see how this data supports the answers you’re telling them.
If you want to talk more about anything in here, please email me at firstname.lastname@example.org or DM me on Twitter @AnneliesGamble.
Conversations with dozens of investors at firms such as a16z, Amasia, Canaan, CRV, First Round, Inspired, Maveron, and Obvious.