Written by Emma Silverman
It’s an exhilarating time for your business: you’re gaining traction, building out your team and heading full-speed towards the next phase of growth. Sound familiar? If so, you’re likely in prep-mode for your Series A. Quick refresher for everyone reading: the Series A is the first time you’re raising money to really start to scale, which is why you need to make it clear to investors that something has “clicked.” Speaking of being clear, before we get caught up in whether your raise is deemed a “seed,” a “seed extension,” an “A” or beyond, it’s worth noting that fundraise titles have become ambiguous over the past few years, and may mean something different depending on the company’s overall strategy. That said, every raise is useful for 3 main reasons:
- It’s a signal to the market that you are a formidable player, and a key moment to amplify that signal to employees, customers and partners.
- It’s an opportunity to bring on new investors and advisors who are experts in your company’s particular stage of development.
- It generates actual capital to run your business.
While the Series A may not be defined by a particular size or valuation, reaching a Series A is a key indicator that you have demonstrated a solid product market fit, demonstrable traction (~$1M+ in annual revenue) and readiness to scale.
What Could Be vs. What Will Be
The key differentiator in a Series A round is that things start to get very real. You’ll need to show actual financials, legitimate targets and an effective, thorough plan to achieve the goals you’ve set. Investors will also take a closer look at your historical metrics than they may have in prior raises. While pre-seed capital may be raised on the premise of what could happen, a successful Series A requires sound evidence of what your company can make happen. So, what’s most important to show your investors? Let’s start with product market fit.
Product market fit is essentially proof that you have created something people want, need and will pay for, however this definition is ambiguous, without metrics or indicators by which to measure its efficacy. Enter entrepreneur and strategist Sean Ellis, who ran growth in the early days of Dropbox. Ellis came up with an effective product market fit indicator: he asked users how disappointed they would be if they couldn’t use the product, and measured the percent who responded, “very disappointed.” After benchmarking over 100 startups, he found that companies with strong traction almost always resulted in at least 40% of users responding “very disappointed.”
More Ways to Show Your Business is Working
There are additional key metrics you should leverage to demonstrate traction: your NPS (net promoter score), Retention Curve (average number of active customers or users within a specified time frame), Churn Rate, (percentage of customers who don’t stick with your product or service), LTV (lifetime value of a customer) and others. Let’s break it down:
Net Promoter Score
NPS is measured using a basic survey which asks existing customers how likely they are to recommend your product or service to a friend or colleague, on a scale of 0–10. Customers ranking at 9–10 are your promoters, 0–6 your detractors and 7–8 are considered neutral. To calculate NPS, subtract the percentage of detractors from the percentage of promoters (so, if 80% of your customers are promoters and 15% are detractors, your NPS score is 65). NPS reveals two pieces of critical information: how satisfied your customers are with your current product, and how likely they are to tell others to try it. NPS scores are useful in and of themselves (objectively, higher is better) and relative to your competitors (people are more likely to recommend products or services in some industries — like food — than others, like internet service providers).
Retention Curve
Your retention curve can be directly correlated to the value the customer derives from your product. While retention curves change based on industry and product, a solid retention curve may show you, for example, that after six months, 60–70% of customers are still using your product. The higher the retention rate, the higher your LTV and the more solid your revenue projections.
Churn
Churn itself may be defined as the point at which your customer stops using your product. The higher the churn rate, the lower the likelihood that you’ve found product market fit. Investors will want insight into drivers of churn and how to reduce it, which you can better understand by conducting surveys and gathering information from existing and churned customers.
LTV (Lifetime Value)
Loosely defined, LTV is the revenue you make on average from a customer during their lifetime of association with your product. The longer your customers are invested in your product, the more likely they are to be repeat purchasers, and the higher the LTV. It is also important to know your LTV/CAC, (i.e. how much you make on a customer vs. how much you spend to acquire them).
Readiness to Scale: Team, Tech, Revenue
Reminder: to raise a Series A you’ll need to show that you’re truly ready to scale. There are several means for demonstrating growth potential: your team, your path to profitability, technical/digital evolution and, where relevant, your channel distribution strategy.
Your Team
A stellar team not only possesses both “hard” and “soft” skills (e.g., experience and hustle), but also has the right balance of the two. And, while many people consider experience the key to entrepreneurial success, experience in and of itself does not automatically lead to an exit; continued grit, determination and a strong sense of purpose are equally important for succeeding as a new venture.
In order to constantly evolve your staff, it’s critical that you put the right players in the right place at the right time. This means starting out with a team who have the relevant skills and experience to build your business; we call this “founder-market fit.” Remember, however, that as your business grows, so must your team, in both size and seniority. It’s important to level up your team at every stage of your business to ensure that you are thoughtfully staffed to optimize your Series A round and move forward. While you may not have all of your people in place yet, investors will be looking for a clear and realistic organizational structure and hiring plan following the raise. Make sure that your pro forma takes into account the key hires you’ll need to bring on board. A few questions to help identify gaps in your team: where do you lack expertise and bandwidth? What do the right candidates look like? How do you find them, and once you do, how do you attract and retain them?
Ongoing Innovation
For most companies, scaling requires more than acquisition of new customers. It also means growing the share of wallet (or mind) with existing customers, improving your product and expanding your presence. And, it’s about constantly innovating, leveraging emerging tech to stay ahead of the game and the competition. You should be well-versed in your plan for innovation and how it will translate across product, channel, category, geography, customer, life stage, etc. What does your roadmap look like? How and when will you get there?
Projecting Your Financials
Financial forecasting at the startup stage can be challenging. In our experience, the easiest place to start is with expenses, both fixed and variable. Leave a buffer in the areas that could get costly (e.g., marketing, advertising and R&D), and don’t leave out tactical items like insurance, office space, technology/SaaS, employee benefits and taxes. Once you begin forecasting, it’s a good idea to have both a conservative and aggressive scenario based on different assumptions. A conservative revenue projection might assume, for example, a lower price point, fewer marketing channels, a leaner team and a single product launch per year. An aggressive projection, on the other hand, might assume a premium-priced option, multiple marketing channels and plans to increase the frequency of new product launches over a set period of time. Of course, the sales channels you decide to leverage will also meaningfully impact your projections; you should have a strong understanding and clear forecast that considers changes in economics relative to your channel mix (i.e. DTC, retailers, B2B and other partners, marketplaces and employers). Make sure that you can clearly and thoroughly speak to the unit economics for your business, and how they will change as you scale.
Your Brand
Brand matters: in today’s startup environment, there is more competition than ever. To survive and thrive, it’s critical to differentiate your business and to create a brand that resonates with customers. Brand identity and differentiation is something investors will be looking for, particularly at the Series A stage. Is your brand developed? Is it unique? Does it speak to your target customers? Does it enhance the mission of your business? While branding is crucial for consumer businesses, (Andie, Parsley Health, and Kindbody are all best-in-class examples of brands that clearly communicate their companies’ values), it really applies to just about any business: Bravely, which just announced a $15M Series A, communicates relatability and trust, which is critical in HR and professional coaching. Obviously.ai, a SaaS business, is approachable and accessible, mirroring its value as a no-code platform that allows anyone to build ML models. Nautilus Labs is more serious and formidable, both requisite qualities to collaborate and move forward with leaders in the shipping industry.
Your brand positioning should be thoughtful and strategic. Every word and image counts. Whether you’re telling your story in visuals or narrative or both, make sure your brand DNA aligns with every element of your business, including your Series A Pitch.
Put it All Together
The best Series A pitches are compelling and dynamic: they draw you in, hold your attention and inspire you. They bring together the mission, journey, key metrics, team experience and vision for the future in one cohesive story. When discussing what we at TMV look for in founders, GP Marina Hadjipateras shares: “Different founders have different superpowers, but as a general rule we’re always on the lookout for passionate people who have great product experience, are experts in their field, know how to sell, and tell a compelling story.”
It’s Called “Navigating” For a Reason
The Series A is a major milestone and a significant step along your journey. It is not, however, a destination in its own right. That said, in a perfect world, you’ve been considering each of the elements we’ve discussed from the very start, honing them as you build the business and creating an iterative path to scale — even before you build your fundraising deck.
Even if you’ve done all of the above and then some, raising a Series A takes time, effort and focus — and almost nobody does it alone. Lean on your existing investors, seek guidance and feedback. At TMV, as pre-seed through Series A investors, we play an active role in supporting our portfolio companies as they prepare for their fundraises. Ask for early input on how to tell your story, feedback on your deck and introductions to investors. Surround yourself with mentors who have been there. Build a community of founder-peers in your industry, whether they’re right in step with your journey or heading toward the next stage; leverage that community for best practices, pitch guidance and overall common experience. TMV GP Soraya Darabi did just that when, in parallel with TMV, she co-founded Transact Global, a community of diverse emerging fund managers who share advice, experience and wisdom. In addition, at TMV we create channels and opportunities for founders in our portfolio to connect, help each other and share insights.
Keep in mind that the pitch is just one piece of the puzzle. To read more about the nuances of Series A strategy — building your list of dream investors, developing a communications strategy, establishing timelines and pacing, creating momentum and more — read Part II of this series, here.
About TMV
TMV is an early-stage venture firm that invests in purposeful startups reimagining the future. If you are building an innovative business of the future or if you are an investor who believes in the power of community and operational commitment, we want to hear from you. Find us at hi@tmv.vc
