Going from Seed to Series A in Europe

Thoughts from my recent presentation at SaaStock 2018

Here at Crane we’ve already had our first cohort of European enterprise seed investments go out to raise their Series A. Coaching our own founders we’ve learned a lot about how the goal posts for Series A are continually shifting and what kinds of metrics investors want to see to get them excited on top of product, market and team. We have also had other portfolio companies raise bridge or late seed rounds to buy extra time to prove out key milestones ahead of a Series A.

We pulled together a presentation on our observations of the current enterprise seed ecosystem in Europe, and the various funding options available to founders as well as the most common reasons why companies fail to make the jump from Seed to Series A. I delivered this presentation last week at SaaStock in Dublin and we wanted to make it available to those who couldn’t attend.

Data shows that in the European Enterprise Software world hundreds of companies are started each year, many raising Angel funding, self- funding or just bootstrapping their way onto the scene. From this cohort around 100 startups a year will raise a meaningful seed round and then what comes next (to borrow a phrase from the London Underground) is ‘Mind the Gap’. From these 100 seed funded companies only circa 25 Seed funded companies will go on to raise an A Round — a 75% mortality rate.

So why this huge drop off — did the ecosystem really create so many bad companies? In a word : No. Many of the 75% will limp on living off bridge or late seed rounds, but will struggle to get to the metrics most Series A VC’s look for, principally $100–150k MRR.

The European market has mirrored the US over the past 3–4 years, with many flavours of Seed funding available to founders — “Seed is a phase” was coined by Hunter Walk at Homebrew (see here) one we agree with 100% at Crane.

Calibrating company maturity to the stratification in the funding landscape will make it easier to target investors and ensure expectations are aligned with respect to traction and typical round sizes investors look for with the different stage.

1. Angel or friends and family is still the most common source of funding to get a company off the ground. It is typically a $1m round, raised on just a pitch deck with no product built. Most startups that raise an Angel Round go on to raise a Seed Round.
2. Seed is the round where you’re typically raising $1m–2m, with an early product, early customers and $10–50k of MRR. Bypassing the Late/Post Seed round and going straight to Series A, is generally the exception, but possible if the early sales process is working and translating into rapid growth.
3. Late/Post seed. Crane invests a lot at this stage, although we also invest in pure seed. This is a more recent evolution in stage of funding and, we believe is especially prevalent in the European Enterprise Software world where Series A investors want to see >$100k+ of MRR. The main objective in this round is to push past $100k of MRR, ideally get to $150k–$200k of MRR, have a repeatable sales process, a large pipeline and a robust product roadmap — which enables you to then raise an outsized Series A.

This evolution in the early stage funding market is clearly positive for European enterprise founders. It’s not uncommon to raise two seed rounds before you get to Series A, so don’t panic and assume you’re failing. The fact is Europe now has more money on tap for earlier stage companies than ever before!

So as a Founder, how do you stop yourself falling into the 75% bracket? We’ve seen many reasons why companies have failed to make the jump from Seed to Series A — everything from taking too long to develop/release product, to infighting amongst the team or the lack of focus from the founders. That said, in our experience, the three reasons Enterprise companies typically fail to get to an A-round.

1. Not iterating: The best founders we’ve worked with are constantly iterating their product based on customer feedback. We believe this to be the number one reason most enterprise start-ups fail is the founder(s) failing to listen to customers and instead believing their perceived solution to the problem is what the customer needs. If you’re not solving a “hair on fire” problem for a customer, then you are not relevant.
2. Failure to build sales process: You’ve closed a handful of early customers and are getting positive feedback on your early product — then what? It is incredibly difficult to then build a repeatable process. Our belief is that this should always be founder led as nobody understands the problem/solution and your product as well as you. Enterprise founders should remain in charge of sales until you’ve moved beyond Product Market Fit, have a clear sense of why customers buy and not delegate the building of the sales process too soon.
3. Too Senior Too Fast: Most of the Enterprise founders we engage with are extremely technical and lack enterprise sales experience and the default instinct is to hire a VP Sales who can BUILD their sales process and FIND their first few customers. This ALMOST NEVER works, if done too early (as noted above). We believe strongly in only hiring an external sales leader AFTER the company has found Product Market Fit and the Founders have built a strong early sales process. Most of the time companies are beyond $100k to $200k MRR before hiring a VP Sales. A secondary but not insignificant issue with hiring a VP Sales too soon is his/her desire to build a large team around them and increasing the burn rate prematurely, ahead of having referenceable customers.

The recurring theme in all three preceding points — the Customer. We firmly believe every enterprise start-ups needs to ooze Customer Centricity to succeed. Every employee in the company, from tech, to finance, legal, marketing and sales need to understand and live this philosophy every single day. If you don’t obsess over your customers, then somebody else will earn that right — and that revenue.

Which brings us full circle to the reason we created Crane FLIGHT— a practical hands on day delivered by practitioners who’ve navigated these pitfalls, avoided being in the 75% and created lasting customer value. We explore all the theme’s above from the sharp end — founders who’ve walked in your shoes. If this is you, come join us for the second edition of FLIGHT at the Barbican in London on 1st November 2018 and take Flight with Crane.

And for all those who want to see my presentation from SaaStock the slides are available here (or video 96 in the SaaStock video archive here).