The Series A battlefield — we made it through…but it wasn’t easy
Fresh from the Series A battlefield, I am a little wounded and am likely to wake up in the future sweating, but we made it through. We are super happy with our lead Investor and excited about working with them, but that’s not to say the process from start to finish was always easy.
While it’s fresh in my mind I am sharing some thoughts and learnings for other Founders who are considering Series A or for those going through it. You probably have moments where you feel the light at the end of the tunnel has been switched off. Don’t give up!
First up, what is a Series A round? While there is no official definition that I know of, most would say it’s something in the region of a few million but less than ten for a significant but minority stake. So let’s approximate, $5m for 20% would be the right ball park. It’s also probably coming from external sources and not friends, family or family offices. These people you are unlikely to know beforehand and will be looking hard at your business and you.
There will always be exceptions, we read about companies that start on a Monday and IPO on a Friday for a billion but that’s pretty rare. For most people it’s likely your business will probably be 2–3 years old, with over 100k of net monthly revenue. To date you will have raised some money, $1 or 2m, from smaller investors and you are likely to be loss making.
You have a choice to cold call VCs, use your network to get some intros or try and engage a Corporate Finance person to help you in return for a fee. At Series A, avoid Corporate Financiers or anyone who wants to be some sort of advisors for a fee. They are useful for more established or mature businesses but a Series A company is, by definition, early stage and had lots of rough edges. Investors will be investing in the Company but you, as a Founder, are a significant part of their decision process. You shouldn’t need a Corporate Financier to sell yourself.
You are likely to look to a VC. There is kudos to getting VC money for sure. They have flash websites and fancy offices but underneath many similar. When you meet them they all say the same things, typically something like this…..
“We are sector agnostic, Founder friendly, value add investor with a strong network that can help you grow your Company to return the value of our fund…..”
What they really want is you to tick certain boxes
1. 100k MRR (ideally contractually recurring with a long contract and little operational overhead)
2. Double digit monthly growth
3. Large target addressible market >1bn
4. A defensive moat — ideally a patent or something very hard to copy
5. Founders with previous successful exits
You will meet many VCs, but unless you are very lucky, you are likely only to meet a gate keeper at the start. This will be a relatively junior person with a checklist. If you don’t tick all the boxes then you won’t get to speak to a decision maker. Some will meet you multiple times and they will string you along. There are many articles on taking VC money but it certainly has its pros and cons. No matter how good your business is, you will need to kiss a lot of frogs to find your investor. Even if your business is amazing and ticks all the boxes it may not fit due to timing or risk exposure of the fund you are talking to at the moment in time.
Timing: Allow 6 months to raise (it took us almost 9). Before you do it you will need to produce a big deck, a shorter deck, a financial model and a business plan. Chances are you won’t have people to do this for you and you are still running your company, so allow a significant amount of time to do this. Do gather feedback but not too much or you will never finish.
Eye on the ball: While you are doing this you need to keep a focus on your company to make sure it’s progressing. Part of the reasons Investors take their time is to watch you over those stressful months. Keep growing or they may walk away!
Metrics: Before you go into pitch meetings make sure you know your numbers. Cost of acquisition, life time value, churn, costs, revenues, tax etc.. Many of the specifics of these are quite nuanced so make sure you prepare. It was all new to me at the start, now I could write a book on it. Remember, the first few meetings are about investors ticking boxes and you selling a story. People love a story.
Term Sheet: After some meetings you find an investor or, if you are lucky more than one, who seems interested. You will meet a few more times and then they will send a term sheet. These are the high level details of their proposed investment and should form the basis of the legal documents. This is an exciting step but at this point you are miles from closing. Don’t lose focus on your business at this point. You need to keep growing.
Lawyer: Get a good one. Don’t scrimp and save on cost. It’s going to cost 20–50k for Series A. Many documents will start flying around now, they will become familiar, but at the start it will be bit overwhelming. Exactly why you need so many is still something I am confused by. We had a good lawyer (happy to recommend him) but one thing to note is you need to stay on top of the details yourself. Your lawyer will pick up a lot of things, but you know your business better than anyone in the world so it is possible they may miss something. Remember, the deal is more important to you than to them so don’t think you can outsource it all to your lawyer.
Due Diligence: Your investor has made an indication of an offer in the term sheet, you are likely to enter a period of exclusivity, but it’s all subject to due diligence. Due diligence is painful and you can see why larger companies hire people to do it. You will need to put every document you have signed, every bit of financial data, polices and procedures, plans, shareholder info etc.. This is a major task and you have to do this while you run your business, show growth and are rapidly running out of cash. The chances are you have not organised things in lovely folders before and indeed some of the things you may not even have and will need to create. You will have to put all this in a Data Room, which to me seems like no more than a glorified Dropbox. We actually used Dropbox!
Get your numbers in order: Shortly before we went through this process our finance manager joined. Frankly speaking she saved us. She created order where there was disorder. Get a good finance person.
Risk: At some point the due diligence will switch from growth and the future, i.e. where could the business get to, to the here and now and the risks. You may even be reviewed (forensically) by a major law firm or accounting firm who are bound to find things that you have not done and didn’t even know about. There is no company at Series A that is perfect so don’t expect to be.
Land mines: With so many people poking at your business who know a lot about a specific topic, at some point something will come up that frankly you didn’t know about. This may be tax, employment, legal, competition based. Be prepared for this. Take it on the chin and be grateful it’s found. Unless it’s a total showstopper a good investor will stick with you as you solve it or develop a plan. You learn a lot about each other at these points. They know there are risks at Series A so be open to discussing these with your new Investor.
Shareholders: Some of your early shareholders will ask a lot of questions. They will give advice. While these people have been critical to date, you don’t have time to entertain all their asks. By definition you have reached Series A so they will make money. It’s a fine balance but it is something to be aware of and will consume more of your precious time. This can be a particular challenge when getting people to sign documents and a single shareholder with a few basis points holding, can delay an entire deal.
Getting naked: During the process you are looking to find a partner that will be with you for many years, its the most intense sort of dating. You will not know everything and at some point you need to switch from sales mode to partnership mode and admit where you are weak and ask for help. This is a tough decision but you will need to do it. We found this hard as we thought letting down our amour was a sign of weakness. This showed our inexperience. Probably my biggest personal learning.
Preference shares and control: Even though your Investor will have a minority stake they will be putting in a significant amount of money. In return they will expect certain protections and essentially veto rights over some things. Unless you have a queue of investors and can set all the terms, then you will need to debate these quite maturely. You will need to accept that the days where you could do whatever you wanted are probably over. It is no longer YOUR company. You and the company are growing up. As a rule, in any negotiation if you both feel a little hard done by then the deal is fair.
Warranties: At the end of everything you need to sign something to basically say “I have told truth, the whole truth, so help me God.” This additional document and supporting back ups are the final pieces of the jigsaw. If it turns out you have not told the truth of not disclosed something then there will be significant ramifications to you, potentially personally, and definitely to the company. Basically make sure you disclose everything.
The finish line: At the end of it you will feel exhausted and while you know you need to celebrate you will also probably won’t feel like it. However, you need to take a moment and share this with the team. It’s a big deal. Not many companies make it to Series A and by getting to Series A your chances of success have greatly improved. Even if you don’t feel like make sure you celebrate. Also, you need to thank your team. Chances are they have been keeping the business operating while you have been distracted with the raise. Without them you would not be here so don’t forget to thank them personally.
All that said, Series A is just a milestone and not a destination. When I told a good friend, who is an experienced professional, we had completed his first comment was…
“That’s great. Who is going to lead the Series B? It’s going to take 2 years so you need to start now.”
As much as I don’t want to admit it, that’s good advice.
Good luck.
