The 4 Kinds of Series A Rounds in Enterprise roadmap for understanding how to go from seed to Series A

A wise VC once told me when dinner is served, you eat. When it comes to fundraising, I’ve learned that if someone is trying to invest now, you should strike while the iron is hot. Given that the headwinds are getting stronger, we at boldstart have been advising all of our portfolio companies to raise as much as they can as soon as they can and to make sure that every dollar spent has a real ROI.

Related to this, the question I am often asked is “what metrics do I need to hit” to get that next round. While super important, I always like to understand where the business is in its lifecycle before answering. Having spent the last week in several meetings with startups going from seed to A, I thought I would break down the various types of A rounds and the major ??? to success:

The 4 kinds of A rounds:

  1. No A round. Sucks. — self explanatory
  2. Vision A round, super hard — raise on the promise and pre-launch, on the vision, huge market with the killer team that can build and scale. sometimes easier to raise on the promise and the expectations of amazing success than after the launch
  3. Metrics A round, easier — killer metrics, repeatable growth and predictable sales model, used to be $80–$100k MRR/$1mm ARR, the bar is raising…
  4. Hybrid A, toughest — this is where you are between 2 and 3 and the hardest to get done.

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Revenues kill the dream counterintuitive - short term revenue can sometimes come at cost to long term opportunity...

I was on the phone yesterday with the CEO of one of our portfolio companies, and we were talking about goals for the next few months and in particular, what the company needed to get a Series A done.

Her answer was quite simply “make the product delightful.” She continued: “I want to iterate to continue to make the product faster, better, and easier to use. I want to get the user to the “a ha” moment even faster.”

And with that I knew that she got it. The company paid user base is already growing rapidly but rather than focus on a couple of features that can boost MRR in the near term, she would rather focus on the longer term.

This reminds me of a quote from Yossi Vardi, founding investor in ICQ (creators of IM and sold to AOL).

“Revenues kill the dream.”

It may sound counter-intuitive but what Yossi is really saying is don’t sacrifice long term opportunity for short term revenue…

What entrepreneurs can learn from Jeff Spicoli you don't have to have all of the answers

I know I may be dating myself here, but over the past few weeks I couldn’t help but think about the movie Fast Times at Ridgemont High and one of the standout characters, Jeff Spicoli.  When asked by Mr. Hand, his teacher, why he keeps coming late and wasting his time, Spicoli answers, “I don’t know.”

 

In several meetings with entrepreneurs during the past few weeks, they would have been better off answering like Spicoli rather than giving me some hollow bull shit answer.  I want to make it very clear that I don't expect entrepreneurs to have all of the answers to my questions.  In fact, many questions I have may not have an answer today so "I don't know" will be your best answer. My one caveat is that the "I don't know" is followed by a how might you figure out the answer or a when might you figure it out.  This line of questioning is really just another way to test how you think and determine how our working relationship might be were I to invest.  I would rather have the honest "I don't know but I'll figure it out" then a made-up answer that will never allow you or your investors to really understand what is driving your business.

Startups getting caught in No Man’s Land stuck between seed and series a funding

“No Man’s Land” is traditionally known as the area between two trenches.  This is a reference to World War I and the vicious trench warfare and hand-to-hand combat that characterized that war. In “No Man’s Land” lay a wasteland of dead bodies and other debris and shrapnel.  Increasingly I am seeing many startups who were ably seed funded get caught in “No Man’s Land” between the seed round and a true Series A round led by a venture capitalist.

This is happening because there are way too many companies raising seed capital but not enough executing their way to a Series A.  This can happen for many reasons including not raising enough capital in the seed round to begin with and of course not getting your product out the door.  So what does an entrepreneur do when caught in this predicament?  Many try to do an additional seed round or add-on to the prior round.  While not a bad idea, this is rarely successful because many seed funded startups have way too many investors who are more apt to write off the investment then to bridge more seed money.  Secondly many angel investors would rather invest in that shiny new car or first seed round then add more capital to a used car or startup that did not “get there” on its first seed financing.  Smarter entrepreneurs are increasingly doing two things to make sure they don’t caught in “No Man’s Land.”  First, rather than getting 20 great names as seed investors, they are making sure to get at least 3/4 or more of the round invested by a couple institutional seed folks that may have deeper pockets and more ownership in the startup to really care about what happens in the future.  Secondly, the smarter entrepreneurs are really thinking carefully about what milestones need to be hit to raise that first Series A round and work backwards to determine how much financing they need to get there.  While not an exact science, it is imperative to think like this as you don’t want to be one of the many seed-funded companies that will linger in “No Man’s Land.”