The typical failure rates for venture funded companies are high – 94% of companies who raise seed funding fail to reach Series A, only 23% of Series A companies achieve series B and approximately ⅓ of those go on to Series C – taking those three data points in combination mean that less than 0.5% of seed invested companies go on to reach a major growth.
So the question is simple; How do seed funded companies prepare for Series A funding and maximise their chances of success?
Notion Capital came together with Osborne Clarke and fund-raising experts Jonny Laughton and Beth Ayers to discuss with founders of early stage technology companies.
Robert Wood and Mathias Loerstscher, Partners at Osborne Clarke kicked off proceedings by outlining the key steps to ensure to mitigate some of the most common problems they see. Mostly this is just about good housekeeping and preparation.
✔ Get everything in one place
Collect all your key documents into one shared folder or data room.
✔ Intellectual Property
Obtain express written assignment of all IP created for the company.
✔ Statutory books
Make sure you have them. Make sure they are up to date.
✔ Companies house filings
All up to date.
✔ Manage your stakeholders
Have a plan for how you will manage consent from existing shareholders. Good to get advice on this.
✔ Roles and responsibilities
Agree with your team who is going to do what. Fundraising can be distracting, so often good to have one founder take most if not all responsibility and leave others to run the business.
✔ Get advice
Engage good quality legal, accounting and investment advice before you start. It can save a lot of time and money.
With all of this in place you will be well positioned to answer questions quickly and professionally.
Two final thoughts. Take advice before you sign a term sheet, be sure you understand what you are agreeing to as they are difficult to change after the fact. And agree a timetable for delivery of the long form documents and the close so you all know where you stand.
You can find more details here.
Jonny Laughton, Armada Ventures
Jonny Laughton specialises in securing Series A to Series C funding for B2B SaaS companies in Europe.
✔ Get to the point
Summarise your business in an elevator pitch, succinctly and quickly explaining why your business exists.
✔ Nail the problem / solution pay-off
What is the value customers receive by using your platform or the pain if they do not. Critically you need to convince an investor that your services are essential not just a nice to have.
✔ How big is the market?
Be crystal clear on your total addressable market vs your initial actual target market, the former being larger and not always fully relevant to your actual target customers
✔ Sell your value
I am often surprised about how little understand have of their value. Have a strong view on valuation expectations, which can be evidenced by deals in the market if possible, and be sure that you are not exceeding the market range
✔ Give yourself time
Try to have sufficient cash to see you through a six months raise process. whilst such a project can be completed quicker, i always advise 12 weeks to term sheet followed by 12 weeks of legals.
✔ Get expert support
Have a CFO – permanent or interim – in place for the A round, otherwise the additional workload will end up with you
Beth, Director of Operations at Cloud IQ was formerly Senior VP Strategy at NewVoiceMedia and oversaw multiple successful fund raises.
✔ Be prepared
Set up a process to store automatically a copy of all key document in your data room. It’ll make compiling a data room for fundraising so much easier. Documents you should automatically store are:
- Board papers and minutes
- Audited management accounts
- Current management accounts (likely already in your board papers)
- Employment contracts of key hires
- Key partnership contracts
- Supplier contracts – suppliers of technology that help you deliver yours; not the stationery supplier
- Top 10/20 customer contracts, especially if their terms are non-standard
- All NDAs related to the above
✔ Know your customers
Be able to easily compile a report of all your customers that includes:
- Name (in a standardised way: include Ltd or not; Limited or LTD; all capitals or just first letter)
- Date contract was signed
- Term length
- Payment terms
- Renewal date; rolling renewal; out of contract
- Price per unit
- Number of units
- Categories to assign it to a cohort: industry; size; location; turnover; etc.
Salesforce or a similar CRM tool set up properly ought to enable you to do this. You may need to add extra fields and integrate it to your billing platform depending on your systems. It’s a bit boring to think about, but will save so much time in DD and will put you in a good to position to scale easily.
✔ Have a plan
Know how much money you need now, what it will deliver, and how much you will likely need in subsequent rounds. Don’t put the results in your first pitch deck, but have them ready to share as discussions and DD get under way. It can look like your existing budget and include tabs on P&L & Cashflow. Clearly document and explain your assumptions for:
- Timing of bookings to revenue and cash
- Split of SaaS and other revenue (services generally)
- Cost to serve/GM
- Cost to acquire
- R&D costs
- Split of total costs and how it changes over time
✔ Know your market
Know the size of your addressable market and your target market. Include these slide/s in your pitch deck and store all primary sources and calculations in your data room. Also include any analyst reports that you found helpful. It will help investors understand your industry faster and enables you to control your story better.
✔ Create your pitch deck
Fundraising is like sales. Don’t go into your pitch expecting to walk out with £5m. The point of the deck is to create interest in your company and get to the next meeting. The deck should be 10-12 slides and have a crisp story that you could tell in 3 minutes. It’s hard to do, but the thinking you do for this will also help your business. It should crystallise your vision, contain your strategy and remind you why you believe in your business. It’s great to turn to on those down days when everything is going wrong, and is also a powerful tool to maintain moral and aid recruitment.
So how do you get there?
Stephen Millard, Chief Platform Officer at Notion Capital, shared his experiences on how best companies can tackle the journey from Seed to Series A.
It’s tough but it can be done
The odds against successfully navigating from Seed to Series C are pretty long, perhaps as low as 1 in 500. But you can dramatically increase success by systematically eradicating early stage product risk.
See Preparing for Series A slides
1. A great team is the starting point
Not just the sole founder but a complementary set of founders who exhibit the characteristics venture most values – a strong vision, domain expertise, and proven ability to ‘get shit done’.
2. Demonstrate product market fit
We often talk about companies that are pre and post product market fit as a watershed moment. Be clear about how you define this and how you achieved it.
- Are you solving the number 1 problem in your market?
- How do you evidence that problem pulling product?
- Who are your ideal customers?
- What success do you have within that ideal customer profile?
3. Achieving a minimum level of revenue performance
This can vary hugely, but at a minimum for Series A, we would anticipate £50k monthly recurring revenue, with the majority of revenue within a single customer cohort and gross margin in excess of 65%.
How do you increase valuation and create VC demand?
- Speed: the faster you can achieve your revenue goals and the steeper the growth curve the better.
- Repeatability: the ability to repeat sell – one product within a single market – is a key driver of value.
- Expansion: demonstrating the ability to expand revenues post sale is critical and possibility the strongest validation of product market fit, the ability to grow revenues in a capital efficient manner and ultimately therefore valuation.
Create an investment hypothesis for the Series B.
This may seem counterintuitive, but the very best pitch for a Series A is an investment hypothesis for Series B.
They need to consider is how next round ready they are? It is too often forgotten that when a VC invests at any stage, that same investor will be thinking about the requirements required for the next investor. – Chris Tottman
How do you get there?
Set a high cadence for execution – quarterly, monthly, weekly – and focus on active learning.
- Problem: What have we learned about the problem we solve? Is it the most important in our market?
- Product: How well does our product fulfill that need?
- Market: Which customers receive the greatest benefit and have potential to receive and create greatest value?
- Model: How well has our pricing and overall proposition been received?
Remember this is a process of systematic risk mitigation, so capture those learnings and share successes and failures as part of your VC discussions.
Visualise success and work backwards to isolate dependencies
Establish the fundamental deliverables of your Series A pitch as early as possible – MRR, #customers, how you will land and expand to show revenue expansion and then reverse backwards to isolate the critical dependencies and outcomes.
- Adapt burn to give yourself time, adopt a scarcity mentality and focus on what matters most.
- Identify and demonstrate key cohorts that best illustrate your story.
- And most importantly always communicate the hypothesis for the following funding round.
Posted by Stephen Millard, Chief Platform Officer, Notion Capital in partnership with Osborne Clarke, Beth Ayers and Jonny Laughton.