Raising capital for the first time is a significant accomplishment for a startup. The vast majority of ideas never turn into funded businesses. While I recommend celebrating with a beer or two (or a few shots of tequila, depending on how painful the fundraising process was), it’s important to understand that raising capital is just the beginning.
Successful companies understand this and develop a roadmap to achieve future milestones for the business. For some companies the key milestone they want to achieve with Seed funding is cash flow breakeven, so their first fundraise is also their last. For most startups, especially those that raise venture capital, the next milestones in the business will be tied to future funding events. Meaning, they want the money they just raised to get the company far enough along so they can raise more money. This next funding round milestone is a persistent theme throughout the life of a startup, but I think it’s especially important to consider for Seed companies as the maturation from Seed stage to Series A ready is an especially difficult transition for most companies.
Why is it so hard? A few reasons. First, there has been an increasing amount of available Seed capital, with a relatively constant amount of Series A funding. This creates more competition for Series A dollars and the oft referenced Series A crunch. Also, and I believe more importantly, it’s hard because Series A investors invest for different reasons than Seed investors do. Generally speaking, Seed investors invest in teams (70%+ weighting) and markets. They invest when they believe a team has a uniquely high probability of success in a market that’s attractive to them. The difference with Series A investors, is that while team and market are still very important, they also want to see evidence of success. What does that mean? It’s usually some combination of an awesome product and the ever nebulous “traction” — which could include revenue, growth rate, customers, users, engagement, and lots of other key metrics (here, here, and here).
So what can a newly funded Seed stage entrepreneur do to set themselves up for success in their next financing? Heed the advice of HPVP Advisor Sam Yagan (CEO ShopRunner, formerly CEO Match Group), and create your Series A pitch deck the day after you close your Seed round. Build a deck with the story, key product and traction milestones, and org chart that you believe are needed to successfully raise your Series A. Work backwards from that end-point to create a resourcing plan focused on the right things at the right time. Your go-to-market and product teams will know where to spend their time, and you’ll know the hires you need to make by what date. If you don’t know what milestones to target for your Series A, ask around. Ask fellow entrepreneurs that have recently raised, ask Series A investors (that could be a fit for your business) what they look for. Every deal (and investor) is different, but with a few data points, you can establish some rough targets to shoot for.
Taking a startup from Seed to Series A is not easy, but with a little planning early in the process, you can get a lot of value out of your limited Seed capital. I’ve provided a bit more detail in the slides below. Oh, and if you haven’t yet raised a Seed round, check out some thoughts on how to make that process less painful as well.