The most important factors for raising your Series A

Steven Loeb · November 25, 2014 · Short URL: https://vator.tv/n/3aa4

Which strategies are the most effective for getting over the post-seed hump?

The VC-landscape has been changing rapidly over the last few years brought on, in part, by new financing options, including crowdfunding and debt financing. The traditional Seed and Series A rounds have become increasingly blurred; as it has become easier to start a business, making it cheaper to get one off the ground, while fund sizes have gotten larger, making it less worth it for funds to invest smaller Series As. That has created what has become known as the "post-seed" gap.

But just how much harder is it to get to that next level? And what does it take to raise that Series A? There is obviously no one answer to those questions, but David Beisel, co-Founder and Partner at NextView Ventures, a four-year old seed-stage venture capital firm, wrote in a post on CB Insights that it has a lot to do with two things: the amount of time in between rounds, and the company strategy.

He outlined four key components, or strategies, that "startups could employ to successfully raise a Series A," the first being the ability to build audience momentum. or fostering product development and marketing in order to creates some organic user traction. 

"This focus translates into big top line figures, including some admittedly vanity metrics and pretty graphs to tell the startup’s story to investors (though with less substance and less focus on business metrics or even deep engagement for now)," he wrote.

The next is generating "meaningful revenue," which "is the best signal of product-market fit," for B2B startups, and "a sign that the company is investable," Beisel said.

Third, startups should "craft a small scale machine," an approach that he says "goes further than vanity metrics in demonstrating ultra-high engagement and penetrations into a small number of users/buyers."

These types of small-scale economics are "often very attractive to Series A investors," he said.

And, finally, he believes that startup should be creating an "unstoppable vision of promise," which really means making the business sound exciting. That can include means such as "sensational press, luminary advisors, blue-chip customers about sign on, a dream team of co-founders, and so forth."

But how do those translate into tangible results? Beisel used the four strategies and noted which of the companies in the NextView portfolio had raised a Series A using each one.

According to the data, the average time from seed to Series A was 308 days, or about 10 months. And, of all four of those strategies, it was the last that came in under that average. Promise created a significantly shortened amount of time from Seed to Series A, with only 261 days. All of the others were above the average

Beisel found that the mean Series A size was $5.2 million. While promise made the time between rounds shorter, it did not have the greatest effect on size round. Although it came in at above average, with $5.6 million, it seems that have a real revenue stream actually means more to VCs, as companies that had that brought in $5.9 million.

Again, having audience momentum, and higher engagement, didn't seem to move the needle much.

So what does all this mean? To Beisel is means that there is no one way for a startup to get to that next fundraising level.

"Rather, the conclusion is that it’s best to explicitly define what the fundraising milestone strategy is during the seed stage. This helps you both effectively orient the company towards a successful Series A and have expectations about the contour and timing of that round," he said.

If building on hype and promise, go for a Series A earlier. Building on a revenue-based strategy? You might have to wait longer, and go for a larger Series A.

"In the end, the seed-stage is all about traction and forming that story if the plan is to raise your Series A as a founder. In order to focus, articulate your strategy and optimize your first 18 to 24 months around that philosophy."

Vator will be holding its inaugural “Post-Seed” Conference in early December, to discuss how venture capital is changing, due to a landscape being altered by new financing options, including crowdfunding and debt financing. Get your tickets here!

(Image source: alexstechthoughts.com)

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