Investors Don’t Know How to Evaluate for Series A

April 11, 2015

8:00 pm

Series A investments are difficult because investors don’t know how to evaluate them. That’s according to Christian Wylonis, cofounder of Fitbay, in his latest Medium post. “We’re the bastard children of the venture market — risky, unproven, and with relatively high capital requirements,” he shares on The Startup Struggle.

Seed funding is easier, Wylonis says. “Investors basically need to like the idea and team and can take a high risk because the valuations are low. Late stage investments (Series B, C, etc.) are straight forward because they happen in mature(ish) companies where the metrics for success are clear and can be easily measured. Start-ups at the Series A stage, on the other hand, are still early with limited historic data and a lot of unanswered questions.”

Thus, the Series A crunch. Seed funding is pretty easy, and sometimes those seed fund VCs get lucky and can raise more money. When they look to allocate more capital with low risk, they will look at safer ventures and bypass the Series A altogether, Wylonis contends. There is, then, a larger perceived risk in a Series A company because it’s more difficult to evaluate. This creates a lack of availability of Series A investors.

“Success at the Series A stage is not about competition or how much money they make. It’s about the product and how people are using it. Series A companies have NOT figured out everything yet so stop asking questions as if they have,” he adds.

Wylonis challenges investors to ask these 4 questions of a Series A venture instead:

What is your user growth and what % is organic?

Especially for startups not in one of the “hot” growth verticals today, the questions that investors are asking force comparisons to companies that might be irrelevant. This question gives startups the opportunity to explain user growth traction and demonstrate how well they know their customer.

How often do people use your product?

Again, look for the opportunity to prove that the product is sticky and that the founders know their customers.

How ha[ve] historic product changes influenced your traction/usage?

This is a great way to discover the startup’s application of build – measure – learn. Communicating with active and churned customers, measuring success, and then getting more feedback is still a crucial part of this process.

What is your growth strategy going forward?

If a startup is still testing traction channels, then there isn’t a clearly defined answer here. Following a competitor’s lead, but executing better, might be the “strategy”.  A company at this stage is probably still monitoring the landscape, trying to predict the future, and going where the puck is going to be.

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Previously the Managing Editor at Tech.Co, Ann Diab has a background of launching and nurturing of startups and tech companies. Empowering and educating entrepreneurs and startups to better productivity and culture is her passion. Growth Manager at WorkingOn to enable folks all over the world to enjoy work and improve communication. Follow me on Twitter.

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