When raising a Series A, knowing your investors is key

Steven Loeb · December 7, 2016 · Short URL: https://vator.tv/n/4875

Winter Mead, Shruti Gandhi, Brenda Smith and and Brian O’Malley discussed the A round at Post Seed

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At our Post Seed conference this past Thursday, Bambi Francisco, Founder and CEO at Vator, led a panel called, "Getting to a Super-Sized A Round and Liquidity." The premise was that Series A rounds are becoming bigger than ever, so what does that mean for the companies that need to raise them?

Francisco asked the panelists, which included Winter Mead, Vice President at Sapphire Ventures; Shruti Gandhi, Managing Partner at Array Ventures; Brenda Smith, President at CV Brokerage; and Brian O’Malley, Partner at Accel Partners, to discuss what a company needs to do in order to get a Series A round in this environment. 

"What kind of metrics do they need? Do they need to be ready to scale? Do they have to have their unite economics down? 10 years ago, it used to be you'd get a Series A to launch your product. That's not the case today; they need to have customers, they need to be growing and what are the metrics to get a $6 to $10 million check?" she asked.

According to O'Malley, even more important than metrics are understanding who the investors are and what they like. That means they will be more likely to listen to the pitch, and allow the company to get a foot in the door. 

"When you think about metrics, a lot of times people will come to me and they say, 'Hey, if I hit X revenue, will I be interesting? Or, if I hit Y number of users, will I be interesting?' The first thing you need to sort for is: how excited is that particular investor in whatever category you're interested in? Because someone could show up to me tomorrow with 10 million users, or $10 million in revenue, in a category I don't like, and it's just not relevant. Someone else could show up with a plan on a napkin and I'll give them a check on the spot," he said.

"A lot of that comes from, what's that investor's background? Where do they invest? Where have they been successful? What did they do as a founder of entrepreneur before? And, so, they're approaching the world with that concept of a prepared mind and what they're excited about."

Also, it's important to put your best foot forward when reaching out, he said. That means being professional and putting some effort into it 

"A lot of it comes to, whether they reach out through a mutual contact, or if they send you a cold email, if that's written well, and if it's like, 'Hey, you invested in X company, and I think that's a great company, and we're similar in these reasons,' you're maybe going to take that meeting prematurely, regardless of their metrics, because they spent an ounce of effort trying to understand what you're excited about. A lot of us, even if we know we might not invest for a year, we'll want to get to know that team because they're thoughtful about how they go about it."

The other panelists agreed with what O'Malley said. 

"I think that's right. You need to figure out which firm to approach based on what they're invested in in the past, and if you want a great, super-sized A round, make sure you're aligned with that firm. You need to be a great business with millions, or tens of millions, in revenue, and if gaming company, and the firm doesn't invest in gaming companies, it's not going to be the right fit to be the firm that invests in your Series A," Mead concurred.

Gandhi also agreed that metrics aren't the most important thing; in fact she suggested pitching VCs in a more emotional sense, rather than simply on the numbers. 

"A lot of companies haven't had a chance to maybe get those metrics, $1 million ARR, over 100 percent growth, whatever that is. The right formula. I always tell the founders to think about it as more of an emotional sell, more than a metrics sell. To Brian's point, is the investor going to get excited about what you're doing?" she said.

"So, you have to do a lot of homework, you have to then go about really being personal around, 'This might be interesting to you, but we don't have the right numbers, but here's why I can show you in the next three, five years. This is better, and take the meeting with me and I'll teach you something in return, but do take the meeting with me.' That's the emotional sell, and the reason why that round might even happen."

This is, of course, not to say that metrics aren't important at all; they can be an indicator of whether or not a company is able to accomplish the goals it has set or itself, according to O'Malley.

"A lot of times the milestones you're looking for, it's not the milestones that are easiest, with milestones that have derisked the business the most. So, having conversations with investors just around, 'Hey, if I showed up in six months, what would you be wanting to see from me?' And then, a lot of what you're looking at, because, again, Series A is still very early, you're looking at, essentially, plotting a line. So, if they come to your with multiple data points and they're on the trajectory that they said they would be, you're going to have more belief  that what they say they're going to do next, the team will actually be abe to accomplish," he said.

Many companies will come in with vanity metrics, like number of users, but what he wants to see if what the daily use of those users is, or what the up sell potential is, or whatever specific numbers apply to that company. 

"Metrics tend to be very focused on a particular company, and the more generic the milestones are that an investor talks to you about, the less they probably understand what's unique about your business."

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