November 20, 2016
When your startup is going for that Series A, knowing what investors look for in a business is helpful when moving from one round to the next.
At Techstars, Ari Newman, partner at Techstars; Bryan Birsic, CEO of Wunder Capital (Boulder ‘14); and Bora Celik, founder of Jukely, a 2-tap concert concierge, give their take on the process and some helpful advice during this Q&A.
What Does “Seed to Series A” Mean?
Ari: The answer is, it varies widely. It’s a very difficult question to answer. As someone who has done 150 Seed deals over the last couple of years, even with all my data I can’t tell you the difference between a Seed and a Series A in terms of dynamic.
The Seed round in today’s market is really about giving the company the capital it needs to take some early traction and early feedback from the market and prove that it can be operationalized and that they have true product market fit and enough learning to then be ready for scale of capital.
I’ve seen Seed rounds that are $500K, where companies make tons of progress that are done on a convertible note, and I’m participating in something right now that is a $4M Seed round.
Of course, $4M is deep in Series A territory but the scope and scale of this company is so significant in that that’s how much money they 1) can attract from the market, and 2) they need to prosecute what is a global opportunity for them. But, still, they’re really early in terms of product market fit and revenue, but every single one of their deals is going to be a six or seven figure deal. Things scale with opportunity.
For the entrepreneur, an important thing to understand is, regardless of how much money you can attract from the market, when you go out and raise a Seed round, you have to make that money work to get to the next set of proof points.
What I see, extremely consistently, (I know this is going to be bad news and everyone is going to tell me I’m a debbie downer) almost no companies raise a Series A after a Seed. There’s always another Seed. Or there’s a bridge on top of the second Seed.
Entrepreneurs, by nature, are optimistic people. We all want to believe that we are going to hit our schedules, we are going to hit our milestones, but although it’s easier to start companies today, (infrastructure costs less, there’s capital around the system, you can hire a global workforce, etc.) the amount of data and proof around product market fit and unit economics and the company’s place in the world, (in terms of becoming an ongoing concern), that hurdle continues to get higher.
What I find consistent is second Seed rounds is that financing is not a dot, it is a line and it is part of your job as a founder and a business leader to keep the capital coming in. If it was a world with just Seed, then Series A and then Series B, it would make everyone’s life easier. The reality is, you can’t always control the things that you can’t control.
What Does “Seed to Series A” Mean in Different Markets?
Bryan: My cofounders and I got into the entrepreneurial scene and started our first two companies in NYC – we were used to those kind of norms and how people talked about these type of things (Seed, Series A, etc.). We moved to Boulder and were looking to raise what serial entrepreneurs in New York would find as a very reasonable first round with basically the angel round at $500K or $1M.
We had some weird cross-cultural miscommunication with investors here who thought, “who do these guys think they are raising $1M?” The size of that round was not seen as an appropriate amount based on where we were.
If I go to the Valley, and say we have a $3.6M Series A, they think I’m a noob and I don’t know what I’m talking about. That’s a big Seed round. In NYC I can describe it as a small Series A, in the Colorado area it’s a very solid Series A. Understanding that when you are talking to those markets and how people are going to bucket you is really helpful to just not come off oddly.
We even had different decks for different people in terms of what we were raising. Sometimes they won’t take a meeting with you in the Valley unless you’re raising at least $2M. If you take that same deck to a local investor in Colorado, they are going to think you are really capital intensive or don’t know what you are doing. So, it’s really worth knowing the markets you’re pitching.
Ari: It's key to know your audience. If you’re talking to a $50M Seed fund, you have to ask them what their normal bite size is. If what you are raising is in a strike zone where their normal bite size will buy them a reasonable amount of the company, that’s the first proof point that you could potentially work together.
If I’m a $50M Seed fund and I’m writing $50K checks and you’re raising $4M for a Seed, my ownership is not going to be interesting nor am I going to own enough when the company scales up that will return my fund.
So knowing your audience and also being realistic about valuation based on the market you’re in are two important things as well.
Don't Be Afraid to Ask Questions
Bryan: I think entrepreneurs are often scared to ask investors questions because of the power dynamic. Ask where they are in their fund, how much they have left, what are their follow on dynamics? That’s an important question people don’t ask a lot.
Those are things that will put you on more even footing, make you look more sophisticated and give you information you need.
Ari: If you got two incompatible dynamics between the investor and the company, ultimately the deal is not going to happen anyway.
Bora: For me in the beginning, and I think a lot of entrepreneurs do this, they actually feel this illusion of the power dynamics, where, “I need money, they have the money, so they have the upperhand.” Everyone I know, including myself, started this way coming out of Techstars.
One of the things I learned along the way, which changed a lot for us, is that it’s actually not really like that.
What is on the other side of the table is money (and a lot of people have money), but on this side of the table is something that is very unique, and that is the entrepreneur and the company, and there’s only one of me.
That power dynamic isn’t like that, it’s an illusion.
Ari: I think it is a tough headspace for an entrepreneur to be in. When you walk into the room feeling like you have the upperhand when, quite frankly, a lot of the venture community and the venture apparatus is set up to scare the shit out of you.
For those who have actually pitched on Sand Hill Road, you go into this huge building, the receptionist walks you into a huge oak gilded conference room, the partner walks in 20 minutes late, they tell you absolutely nothing about themselves or their fund, they ask you a million questions, and then they say thanks, super interesting, I’ll chat with you soon. You walk out of there wondering what the hell just happened.
That was the power dynamic I was talking about. What Bora is talking about is flipping that idea on its head and being the person that says hey, I got something special and unique and if you want to work with me for the next decade, let’s figure out if we are going to be able to connect and have a relationship.
There are a lot of investors out there, and just because someone else gave that investor a checkbook does not make them either a genius or a person for you to be spending the next decade working with.
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