Plotting Your A Round

The easy goal for most SaaS and marketplace companies is hitting $100K MRR with steady MoM growth to reach Series A. I hear that number consistently. While there isn’t one size that fits all, for the sake of this post, I’ll run with that number. With a number in mind, how do you hit that Series A goal and what do investors expect growth to look like moving forward?

It’s not about simply reaching a revenue figure and showing investors real dollars. Factor in the timing of growth and show a quick acceleration from low revenue to $100K MRR (just a made-up number).

Plenty of startups have struggled to gain significant interest and have sat at low $10-20K MRR for months or even a year+ to eventually figure it out. Four months later they're seeing 25-50% MoM growth and show a growing funnel with repeatable conversion at the bottom. That four-month sprint with a pro forma showing 3X+ growth for the next year of operations is what gets investor attention. Take the same product and stretch that revenue growth over 2 steady years and it's far less attractive.

With increased seed deal volume (~175% increase from 2010 to 2013 and leveling off in 2014) comes increased Series A options for investors. Some companies will raise with little revenue but an intense user adoption growth rate. Some founders will sell a grand vision of solid technology and avoid the revenue lust of VCs. These are the outliers. Most startups won’t raise again. Think strategically about revenue growth and building a healthy company.

Execute on your seed round goals and have a revenue-driven investor introduction to make it to the grand vision discussions.

Being Coachable Isn't Enough

Being “coachable” is a must-have quality, but I feel it’s used to say someone is able to listen, face shortcomings, and execute on the unknown with some guidance. So “coachable” is missing the distinction of willingness and interest.

There’s a constant in the strongest people in this industry that exists inherently within them. It’s the thirst for knowledge-- a serious will to learn anything and everything --and the application of it to create wisdom.

Wisdom is a deep word that sounds like it comes with a grey beard, but I mean it.

These same people that strive to know and understand anything they can are masters at extracting as much as possible out of an interaction. No conversation is a waste of time because they know the other person has something they don’t.

VCs and angels working with early stage companies are all interested in the product and tech, but there’s a much more important aspect. Which founders are able to extract the knowledge they didn’t even know they needed? Who is constantly learning and consciously working to deeply get what it all means? Coachable is too lightweight of a word to explain that.

Master the art of conversation and extract more than the words being said. 

Just Close the Round

How much do you give up? How closely do you protect it? Who’s worthy? Are you going to be rich? How long until someone supports your yacht-buying habit?

The better question is: “How do you build a really big company?”

That question aside, protecting equity is something you need to be mindful of, but it shouldn’t inhibit the raise and growth. Founders raising equity for the first time typically spend too much effort on this and get sucked away from the business. The sooner the round is closed, the sooner you go back to being CEO and building a meaningful business.

The first step is understanding the mechanics of whatever kind of round you’re raising, and how it affects equity in the future. Extend that look beyond just conversion of debt at the A round. Build scenarios to see where the founders and employees stand after a few rounds that end in hypothetical acquisition. And be realistic. Some of the newer tools I’ve seen for this are Captable.io (Eric Ries) or Conjecta.

The next step is logically weighing the marginal cost and benefit of taking on investment (whether as stock or convertible debt). At the end of the day, if the terms aren’t ideal but all that’s out there, go with it. Without significant revenue to offset burn and to bootstrap the business, you’re in a better position to grow with capital to take advantage of opportunities.

Some basic questions to consider when giving up equity. 

  • How big do you see this business? (a small piece of something big = $$$)
  • What amount of funding do you need/want? (can you realistically bootstrap?)
  • Headcount needs as you scale (probably more than you think)
  • Market Size? (small market = small exit)
  • Can the investor materially move the needle? (strategics are worth a little more)
  • Could the VC lead an A round? (minor warning on signal risk if they choose not to lead)
  • Will you die or be a zombie before the end of the year without it because you’re waiting for the business to miraculously explode with paying users?

My personal opinion is you should take the investment if the deal is right. That part about being “right” can vary widely for the same company at any point in time so be smart about it. Weigh the options and don’t protect equity to the point that your startup fails. If money is on the table, take it and just close the round.

Leverage Network > Pitch more > Raise more

Everyone and their mom talks about network effect. And most people leverage their network the same way that mom does, LinkedIn. It's noisy. How many requests have you accepted from people you've never met or even intend to? 

Conspire is changing that for me, and I've since abandoned LinkedIn (other than accepting requests from people I've met and know). 

Connections on Conspire are driven off of email versus simple connectors via random invites. So when I search for someone I need to connect to it’s based off of people who actually talk to him or her and how well they know them. Techstars companies and the broader network are using it to get the warm intros needed to angels and VCs, and really anyone they need to start a relationship with. 

Especially If you’re putting a round together: use it.

Breaking the Venture Stigma

The reason why startup exists is the accessibility of it all. Any college or high-school student can learn to code, to build something, and to try to make something of it. And it’s getting better. Startups are trendy and more and more young people get it even though they aren’t in a hotbed of startup culture.  I’ve participated in a couple of 3 Day Startups, most recently this past weekend, that give a quick glance at what it’s about for undergrad and graduate students.

But what about venture capital? Unless you went to an elite school, venture capital wasn’t on the curriculum. It wasn’t in the class schedule. Your parents definitely didn’t teach you about it. The career fair doesn’t include it. Most people hear “VC” and think of some mystical career path that leads to endless riches. The more time I spend with college students, the more I understand this. 

And it’s the opposite of that mystique since most funds will underperform like anything else. It’s incredibly hard.

If you start a company with the concept of VC in the back of your head you, hopefully you think of everything like a VC. It’s just good practice. That shouldn’t drive each decision, but it’ll help. I think of everything differently. Every product, store, commercial, business model, structure, and intricacies of family businesses that will never consider institutional money… everything. This includes simple processes I use to complete even the most mundane tasks. There was a different lens on my world just 4 years ago.

I hope to see a dedicated venture capital course at my alma mater in the next 10 years. If I can make that happen, I’ll teach it myself. I want to see the same in schools across the U.S., not just Ivy League and top business schools. Take the mystique away and show the hard work and dedication it takes. Show students that if they create something meaningful and work to understand the world deeply, it’s available to them, too.

In the end, it's just another inroad to getting away from the corporate life :)