Recently in Series A Category

The Billions of Dollars Opportunity

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Time was, if you had at least a hundreds of millions of dollar market, or up to a billion dollar market in your pitch, that was enough to get you funding. But today, I've heard multiple times that even a billion isn't enough, let alone hundreds of millions. Venture funds are now looking for multiple billions, into the tens and hundreds of billions of dollars market.

Some might argue that VCs were always doing this - what's different now? Why is this important today?

Early stage venture funds are using this as filter. There are too many startups out there, so why not say no to everyone except those with a believable billions of dollars of market story? The implications of this are, the startups with smaller opportunities will find it hard, if not impossible, to get funding.

Startups don't realize the danger, and seed investors are starting to wise up. There are too many chasing after too small opportunities to be able to pass this filter. If you can't raise money, it may be that what you're working on is too small, even for a hundreds of millions of dollars opportunity.

Suppose you get to some impressive scale, like $1M+ in revenue run rate. As you go for the big round, the current crop of series A funds won't even touch you despite having strong revenue growth. If your market is small, so is your potential and your ability to "unicorn" is not all that great.

So if you're raising seed, I would figure out what it is you're doing if not a billions of dollars market and change it to be one. Investors are always searching for unicorns and it's best that you shoot for being one from the very start or else you may not get very far in your fund raise....

Metrics for Series A

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Over this last year, I have been watching a whole group of startups attempt to land their series A. One aspect that has been shown to be incredibly important for sophisticated and series A investors is showing superior metrics and your knowledge surrounding them.

Why Metrics?

With internet startups, practically everything has been shown to be measurable.

Showing that you are tracking the right metrics means that you have experienced personnel in tracking the progress of your business.

Showing exponentially rising metrics means that you have found a way to grow and capture share that is grabbing customers in ever rising, large numbers, and that is hopefully growing faster than your competitors. Investors love startups that are growing exponentially in a short amount of time; for startups, time is your enemy and showing that you can get big quickly is critical.

Exhibiting metrics that are not only growing exponentially, but large in magnitude helps a great deal. But at series A level, the magnitude of the metrics may or may not be enough to land your next round.

Metrics on Demand

We have seen that investors demand that whomever is pitching should know every metric by heart and memorized. This shows that the team members are living and breathing metrics day in and day out.

If you cannot spew metrics on demand, you substantially reduce your ability to grab that series A. Investors are seeing too many pitches where the people pitching can recall detailed metrics from memory; it shows an obsession with tracking and deep knowledge of your business. If you don't show an equivalent grasp of the metrics, then investors may get skittish and think you don't know enough of about your business, thereby increasing the chance that something unknown might sink it.

You must also show proficiency with metrics, showing not only that you are tracking the right ones but that you are using them effectively to grow your business, and methodologies to improve and test them and also make them better over time.

Which Metrics?

As I sit down with startups, many need to track the same metrics. But different types of startups will have different metrics, and some will have different metrics they will focus on given the situation.

The topic of which metrics to track is too broad to cover in this post. Suffice to say there has been written on the topic of metrics, many of which can be found on the KISSmetrics blog. This book is about to be released: Lean Analytics by Alistair Croll and Ben Yoskovitz. You can buy the pre-release PDF at the O'Reilly site if you're impatient to wait until March.

Some great articles and posts to read:

Single Startup Metric - this is also discussed in Lean Analytics. It is about focusing on one metric at early stage to drive the success of your business and not getting overwhelmed with too many metrics.

9 Metrics to Help You Make Wise Decisions about Your Start-Up - A great list of common metrics used to drive startups' businesses.

Cohort Analysis - Measuring Engagement Over Time - Cohort analysis is very important. Showing increasing engagement across cohorts and over time is critical. Setting up the same graph with other metrics like LTV, which arguably is a measure of engagement, can be very valuable and worthwhile for an investor to see.

Ecommerce is a slog -- what's your angle ? - Fred Destin has an easy discussion on ecommerce metrics.

E-Commerce: What are the most important metrics for e-commerce companies? - A broader discussion on ecommerce metrics via Quora.

SaaS Metrics 2.0 - A Guide to Measuring and Improving what Matters - Written by David Skok of Matrix Partners. Great overview on metrics applied to SaaS businesses.

Many more great posts exist out there. Search on " metrics" on Google and also in Quora.

By the way, toss Vanity Metrics. Save those for the press; don't waste investors' time with them. Definitely don't use them for tracking the growth of your startup internally; they can lead you down the wrong path to death!

Are My Metrics Good Enough?

When you meet with seed investors, they may overlook the fact that you have metrics that are miniscule or non-existent. Seed investors often don't have traction for proof and need to invest on the dream more than concrete proof.

When you get to series A, the bar gets raised significantly. Very few startups get series A on the dream today; we can always find the example startup or exception - but that's the point - it's the EXCEPTION not the rule. Much better to have shown that you have a good handle on metrics and the metrics themselves are great.

The elements of great metrics are easy. You need ideally all four of:

1. Show that you operationally have a great handle on metrics, tracking the right ones, showing that you are applying strategies driven by those metrics, and have on staff the right people doing the right things with the appropriate technology in place.

2. Exhibit metrics large in magnitude, ex. not 100s users, but millions of users (or maybe 10s of millions of users now).

3. Exhibit exponential growth in key metrics. Linear is not good enough for most metrics - an example where linear might be still great is linearly growing LTV over time. Mostly, show a real hockey stick up and to the right!

4. Show that your metrics are greater than industry benchmarks and/or competitors.

If you don't have all 4, series A can be a real slog, potentially unachievable in today's Series A Crunch laden market where there are too many early stage startups coming up for their next round. Why? It's because too many startups have a handle on all 4 items above AND have higher magnitude and exponentially growing metrics than you. You've got your work cut out for you!

So the overall goal would be to achieve all 4. The first goal is item 1. Build the dream team for metrics and put in place technology to surface all sorts of metrics that you need. Use awesome tools like KISSmetrics and/or build your own. If you don't have 1., then other 3 are going to be super tough and you'll be reliant on luck to get there. Don't rely on luck! Throw the odds in your favor of achieving the other 3 by being deliberate with respect to metrics, not haphazard.

Once you build the dream team and have the right technology in place, then you need to find the right metrics. Read those posts above. Get the right help - talk to others in your industry who have experience in metrics like yours and get their help in developing the right metrics for you to work with. Replace vanity metrics with better ones!

Let's jump to item 4. This one is easy. Search Google, look at annual reports of public companies operating in your or similar spaces. Look on Quora for someone who may reveal metrics that you can't find elsewhere. Search Slideshare for an elusive presentation that may reveal industry numbers. Check industry reports for more. Now you have a target - if you can show that your metrics are better than existing companies out there, that's impressive!

Back to the hardest of the 4: items 2 and 3. How do you achieve these, and both in magnitude and exponentially growing numbers? Ack!

No magic I can impart on you from this post for sure. I will say that if you've got item 1, you're well on your way to do the right things to get there. This is where the rubber meets the road and now YOU have to make your project shine.

What If I Don't Have All 4 Items?

If you've got all 4 items, then why the heck are you reading this post? Go out and raise your series A!

However, if you've gotten this far, you may be one of the hordes of startups which do not exhibit all 4 qualities. What do you do now?

If you still have runway, go out and improve your metrics!

If you need to raise, then here are some suggestions to increase your chances, knowing that there could be hordes of startups with unfortunately much better metrics than you:

1. You probably can't hire since you are running low on cash and need to raise, unless you can get somebody to sign up on equity. But you should go to investors with someone who at least is tracking and implementing a metrics driven approach in your startup. That person could also be you! Bring that person to the pitch so that they can show uber-expertise in metrics at your company.

2. The most common problem I've encountered are items 2 and 3. You either have low magnitude numbers or slow, linear growth, or both. If you have either 2 or 3, you still have a chance to raise on the vision and team. The better one to exhibit is exponential growth, even with low magnitude numbers. If you don't have growth but big numbers, investors might think that your growth has stalled, or you're doing something wrong, or both.

Metrics are an important part of the startup process. Investors today demand not only great metrics, but people on the team who understand the critical metrics in the business and can use them to grow the company. Implementing technology and process for metrics in your startup will greatly increase your chances of landing that next round. Don't wait - do it now!


"Can I get you to Series A?"

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In my last trip to NYC, I had breakfast with my buddy Steve Schlafman of Lerer Ventures. I was talking about how many of our startups were going up for series A, and how it was filling my brain and time on how to get these guys there. He replied that they had always thought that way, at which time I thought about how slow I was on that uptake, that our job as seed investors was to help groom our startups for series A!

But as we talked, I also began to think heavily about the importance of series A and it's now becoming an investment criteria of mine, which is "can I get this startup to series A?".

The importance of the next round of funding is pretty clear; you need cash to grow and if you can't get it from some future funding source, it could kill you. However, in order to get your next round of funding, you better exhibit some key characteristics.

So I now look at startups with an eye towards these key characteristics, and I think heavily on whether or not they can with or without my help get to a point of exhibiting as many of those key characteristics as possible. If I decide they cannot, I think I would be less inclined for investment. But if I can see the creation of an environment where the some future investor would look favorably on this company sometime before their runway is over and invest in a series A, then I would be more inclined to invest.

Of course when I meet them at early stage, they rarely exhibit any of those key characteristics. How will I know if they ever will? Some would argue that it's nearly impossible to predict the future and that smart people will get there no matter what. Unfortunately, I am not sure that is enough any more. Smart people can succeed or fail either way. I am out there looking at startups with an eye to tilt the odds in favor of success and not just betting broadly on the crowd of smart people.

What would make me think that they can get there?

Without diving into the well trodden areas of what makes a great startup to invest in (ie. big markets, no competitors, unique IP, etc.), I think there are some additional things to consider:

1. Is there a larger investor in the round AND who is willing to support their startups after the first round?

All angel rounds used to be OK but I do not believe that is the case any more. This has to do with runway and the inevitable bridge round that comes after. We've pretty much bridged everyone of our startups of the most recent vintage. This is because we have been telling startups to raise and survive for at least 18-24 months. But I am not sure this is enough any more since a ton of my startups all need more runway. Thankfully many have had a large investor who was willing to lead a bridge and/or put in a large amount in to give them more runway.

However, it is unfortunate that not all larger funds are willing to do this. I am hopeful that perhaps they will change given the changes in the startup ecosystem. So I am actively searching for seed stage funds to work more closely with who have a true willingness to bridge after the first round.

2. We used to tell startups that they need to ensure their runway was 18-24 months, but now I do not think that is enough - it may actually be 24-30 months now. The evidence is in the bridges that we've had to do. Sure they all got to some level of traction by 12-18 months; but it didn't guarantee a series A. Either they needed to spend more time developing their startup, or developing their series A characteristics, or spending more time raising their round then they thought - or all of the above.

By my observations, there is a series A crunch. There are too many startups all clamoring for series A; it is impossible for everyone to get their next round done - there are many more seed stage startups being formed but the number of series A funding sources has not increased by the same amount.

However, the other issue is, how many series A characteristics are you exhibiting after you come near the end of your initial runway and are they worthy enough for a fund to invest in you?

The battle for attention is fierce; consumers and B2B customers are being deluged by tons of products and services. Traction is much harder to come by. Thus you need time to develop traction which early stage startups typically do not have. Yet another reason for the bridge, when they realize that their traction numbers aren't good enough for the series A and they need more time to develop traction (and everything else).

The other thing is that there are few startups who can raise a typical $1M round and last 24-30 months without additional funding. This is why I think that most categories for internet startups are moving far to the right on the famous "crossing the chasm" graph and it is getting too dangerous to play as an early stager in those rounds.

3. The round must be big enough. Too often I meet entrepreneurs who only want to raise $200K-400K. Sadly I have to turn them away. There are many reasons why they only seek to raise a relatively small amount. However, if you have a great idea with all the other prerequisites (ie. big market, no competition, great IP, Stanford/MIT grads, etc.) you should go out and raise at least a $1M if you have those attributes! What's stopping you?

In fact, if you don't you'll inevitably end up with not enough traction at the end of your $200K-400K and you could have a tough time raising on mediocre metrics - which means you could die even though you had a great idea to start. The fact remains that it is usually easier to raise money on the promise than afterwards on mediocre metrics.

The basic problem is, in the past, you may have been able to get to your next round with some level of confidence in the past with only that much. In today's world with the way the ecosystem is, your chance of getting near nowhere is uncomfortably high.

4. Looking at the startup plan itself, I think deeply about it and the ecosystem surrounding it. What will it take to get this startup to exhibit a decent amount of series A characteristics? This will be both subjective and objective; we analyze the plan and do our research as well as put our best guess and intuition against it. Can this startup make it to series A in a reasonable timeframe? Can they do it only with the money they raised? Or should we expect a bridge? Or, given what we know about the VCs who play at series A stage, will this startup get to a place where someone will step up to fund them? Eerily, revenue can play a big role yet again - this is very reminiscent of what happened to investors back in 2008 during the economic downturn; investors starting putting money into revenue generating startups for their survivabiity. I believe this factor will play a major role yet again in today's world because this lengthens their time to develop series A characteristics.

So if all these factors align positively, then I think the startup has a good chance of getting to the next step which is series A. Still, the world is changing very quickly now and I'm changing my thoughts and strategy in near real-time. In the near term, the ability to create a condition where series A is achievable in the timeframe that a startup has, has now come to forefront of my investment criteria.

This year, I've got a number of startups all gunning for series A. A lot of us have been working on getting these startups to a point where they can present the best possible chance for getting their next round. Then, on the 500startups discussion board, the same topic came up and I posted an answer there. Rather than having it trapped there forever, I thought I'd repost it here (and edit it slightly) for all to take a look at some of things we're thinking about as we're prepping our startups for series A:

So what makes you most attractive to landing a series A? Sometimes it can be infuriating to see a competitor get funded and you not. Sometimes you can't even tell why.

Here are things to work on for your series A, that can help you land one:

1. Relational - if the VC knows you, has a history with you, or even better has had an exit with you, then they will back you. Go out and smooze some VCs now!

2. Interpersonal - Very few VCs will invest in you if they can't stand being around you. So work on your interpersonal skills.

3. Show entrepreneurial attributes - This is a given. Don't let them think you aren't going for the gold even in the slightest.

4. Big market -If your market is not big, you're in trouble. Better go find one.

5. Vision - It could mean that your vision is big and strong enough. If you have a small vision for your future, or an undefined one, that is much less attractive than if you had one.

6. Traction, showing large/exponential growth - This one is hard to attain at early stage. but then if you have tremendous traction, then why do you need funding? So make them pay up! For some startups, your revenue path is very unclear so you absolutely need to show tremendous traction before you get funded. If you are making lots of money, that's obvious although then you have to show how much *more* money you can make - making $1M is awesome but if you can only make $5M max, that's not so awesome to a series A VC.

7. Understanding of key metrics, even if not large in magnitude - This one is most important if you don't have 5. For example, for ecommerce, you need to show that you can acquire a ton of customers cheaply, and sell them something that makes you a lot more money than what it cost to acquire them. Show that you can then keep selling them more stuff and you have a lifetime value that is super high. Then a VC can then just think if they spend $X million on customer acquisition, then I will make $X+Y million. If you can show great metrics but not necessarily tremendous traction, then you need to show metrics which will talk about your potential, once you get tremendous traction.

8. Why are you better than your competitors - If you have a lot of competitors, the probability of you getting funded drops. If you have less, the probability grows. In either case you need to show why you are better than the other guys in your space.

9. Exit potential - 10X or better - For series A, they will look to return 10X or better. They will NOT be playing to exit at 3-5X. If you can't show that in your numbers and potential, you'll never get your series A. Work on your plan and story to get that. Study M&A data to understand if it's even possible.

10. Timing and market conditions - Here is one example: after instagram got bought for $1B, that ruined the market for all the other startups out there trying to get their series A; all the VCs started hunting for the next instagram! Talk about herd mentality. However, after 2008's crash, VCs started looking for revenue generating startups and less those that only have traction. So the market changes regularly.

11. Defensible, sustainable competitive advantage - This attribute has been around since the dawn of venture time. If you have one, a REAL one, then you will be fundable.

Knowing the above, then comes to another part of this puzzle for those raising money now, which is how much money do you need to make a good showing in a large number of the above?

We tell people to raise for 18-24 months now. It could be even longer given the type of startup you have. 12 months or less is definitely not enough in today's climate. So it could be $500K, it might be $2M - whatever is appropriate for what you are building. Also remember there are two levers to adjust: how much you raise and how much you burn. So it's not as simple as doubling your raise to get to 24 months - it could mean you should burn half as much.

NOTE: 18-24 months is HIGHLY dependent on industry and market conditions at the time. It was 12 months back in 2006 timeframe; it could be worse in the near future. Or it could retreat back to 12 months. Like it or not, it's 18-24 months right now.

Should you ask VCs what they look for in series A?

Asking VCs does work but it may also not work. Unless your business is in a category where there are known metrics, like ecommerce, or in an area where the VC has experience in a previous investment, it may be hard to get a good answer. You may get a generic answer like "show more traction". Well that's nice, but how much exactly? And is that enough? So find a VC who has experience and investments in a similar industry AND is friendly enough to take advice meetings in their busy schedule and you could get some good answers. But they could also be generic answers.

I think a better path is to find someone in a similar business who can tell you what metrics they track and see if they adapt to your business.

Proving and Showing the 10X Return Case

Another thing you can do is to do some math to show that you can generate a 10X or better return for an investor via comparison with historical data.

First, if you can, look up similar companies in your space. for some this is impossible. for others you may need to look at what a potential acquirer has paid for in the past. and still for others, it could be that you can find some public companies in similar spaces for comparison. google around the web for M&A data. some of that you'll have to find in a M&A database like MandAsoft.com or CBInsights.com. Look also at press releases, Techcrunch, SAI, etc.

Second, if they have revenue, this is most straightforward. Look at typical multiples on revenue or EBITDA. There will be high/mid/low values for typical M&A-ed companies, or easier when a company is public.

If you don't have revenue, this can be very hard. You may just need to find M&A data on companies that were acquired by a potential of acquirer of you. Gather metrics on those companies, like number of users, etc. to use as comparison.

Next, now you relate the performance of your company at a given exit value. But what is that exit value? Now go back to some scenarios on funding. For series A guys, what would a potential valuation be, for a given amount raised? Let's say you want to end up at $20M post money. If a series A guy wants at least 10X, then you would have to exit at $200M assuming no more rounds of financing after them (highly unlikely that other rounds may not be required, but let's start here).

If you have great revenue potential, then take the multiple on revenue and the multiple on EBIDTA and figure out what revenue you'd have to make in order to achieve that $200M, and/or also what your EBIDTA would have to be. Now you have these two numbers - if you can build a believable plan to get to these numbers in a reasonably short amount of time, say 5 years or less is optimal, 10 years is the absolute maximum which is the typical life of a fund, then you have a good chance of getting a series A.

If you're off building to huge user traction, looking for the Instagram win, then you'll have to show the traction buildup of similar companies sans revenue.

Remember that Pinterest took 1.5 years of hanging around until they started to hockey stick. Twitter took almost 3 years - those guys could have hung around for 10 years if they wanted to. But once they took off, then the game was on.

There are many out there who are looking for high traction services, either to find the next Instagram or on the assumption that if you have that many users then you'll be valuable to someone eventually, or you'll figure out how to monetize them even if with ads.

So all traction based/sans revenue startups have to do is to get to their own hockey stick and survive long enough to do so, but you may have to wait until that hockey stick happens before you get your series A....

Now having said all that, put all those calculations and data into a slide in your deck and get ready to talk through it with a VC. Don't count on a VC to do that math for you; they may not have enough experience in that industry or sector to do it on the fly.

If you can't achieve those results no matter how you jigger your spreadsheets and models, then i think you have a pretty low chance of getting a series A. if that's true, THEN DO SOMETHING ABOUT IT. change yourself. pivot what you're doing and/or pivot your plan. otherwise you're going to have to figure out how to survive on just your angel round, assuming that the angels you get also have lower expectations.

Am I Sunk If I Don't Exhibit Typical Series A Attributes?

While not being able to show typical series A attributes, it doesn't lower them to zero. There can be so many random factors that can land you a series A.

I would say that most VCs are pretty conservative relatively speaking and want proof points alongside the vision and things that are not yet shown or proved yet. but that doesn't mean you couldn't find someone to bet on you even with large sums of money.

The lesson here is: keep trying! Don't give up! If you have absolute proof that you should change your pitch, then do it. But there also may be somebody out there who will fund you with your current plan. You'll never know until you pitch as many people as possible. So DON'T GIVE UP.

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