Startup founders should really understand when is a good moment to look for a Series A. Based on our experience most founders start to look for a Series A to early with over optimistic expectations and under appreciation of growth metrics. VC invest when certain criteria are met. A helpful read is Sequoia’s YouTube invest memo, which spells out how a top Sand Hill VC identifies a Series A company. It is important to understand when and what series A investors are looking for.
We cannot stress that startup that has growth without founders with a big vision/big dream cannot succeed with a Series A. Big vision means that the technology needs to be game changing and there must be some cultural shift attached to the technology. For example, Steve Jobs = give consumers personal computers or Elon Musk = build technology that will support life on Mars. Founders from Europe struggle with getting attention of big Sand Hill VC because they are unable to demonstrate a big dream. Big vision translates into money raised and high valuation.
Top American investors have a unique focus on product. Many VCs in SV are former product development guys. Product focus is something more than product market fit. Product focus is also more than having a strong technical stack in your startup. VC will want to understand how a product works, how features are developed and how hiring needs flow into product development. VC will want to use the product, share the product and take notes. Many Silicon Valley VCs will review app updates, press releases and reviews as well as reach out to competitors. Series A focus on products means that the startup has to demonstrate that users are excited about the features and the feedback loop is tight. There are many great European startups with strong tech, which does mean they are capable of translating technology or service into a scalable product for the masses.
Series A investors invest in companies with valuations that range between $10M — $40M. The standard check sizes of Series A funds is between $5M-$15M. It should be pointed out that many seed financings have become Series A with seed valuations ranging between $3M — $9M with check sizes between $1M-$3M.
Series A investors look for founders that are able to attract, hire and manage people. It is not enough to code or sell products. Good founders at the series A stage need to attract “star” VPs. Solid series A company have founders that have the ability to recruit senior people or people with better skills sets then themselves. Series A investors are looking for evidence of this.
Product Market Fit
Startups that are spot on for Series A are that companies have transitioned from early adopters and unclear markets to early mainstream customers. The company itself has a clear understanding of the market and how-to market to potential customers. The series A investment will accelerate rapid growth. In other words, the company has “crossed the chasm”.
Series A funds are looking for a clear marketing strategy and at least one sales channel with strong unpaid (organic) demand. Series A VC look at metrics like CAC, LTV and churn. SaaS and marketplace companies are scrutinized for GMU.
Series A funds want to see defensibility aka the company’s secret sauce that makes the startup unstoppable and allows you to keep customers in your value chain. The secret sauce should increase with your scaling leaving the competitors behind you and create network effects. Think Facebook plus Whatsapp + Instagram + messenger.
If you have these you are ready to talk to a series A VC.