Avoiding the POC death trap (2/2)

What Series A investors look for

The over enthusiastic VC intern may have somewhat miscalculated the startup’s MRR growth rate

In my first post of this topic, I covered strategies to accelerate sales and customer adoption for enterprise software products in markets that typically require POCs.

Fast forward 12–18 months from your seed round, when you’ll start pitching to Series A investors. For reasons outlined in the previous post, your business may not be at or close to the typical traction metrics that investors typically like to see in Series A SaaS businesses (e.g ~$100K+ MRR). So in this post, we’re going to look through the lens of follow-on investors. Here’s five key proof points around customer traction and product market fit that will impress:

1. Customers who love your product

A significant pool of customers of a broadly similar profile that have signed up to pre-scale agreements. Even if these are low in commercial value, as long as they are paying you and have a clear upsell path, then that’s a strong signal. I’ll go out on a limb and say for enterprise customers, ten customers is a slam dunk, five is probably good enough and anywhere in the middle is great. What is important is that virtually all of these customers should be very disappointed if they could no longer use your product and have potential and intention to use it at meaningful scale. Investors will do reference calls to each customer to validate this.

2. Successful upsells

Investors will want to see both the conversion rate and time it takes to go from pre-scale agreements to commercial sales. At least two (of your five to ten) pre-scale customers should have been upsold to commercial agreements; having only one probably won’t be enough.

3. Established pricing

An investor will look at what you’ve actually charged customers and extrapolate your revenue potential is at scale, i.e. can this ever be a $100M ARR business? For example, if 100% of customers in the markets you are targeting bought and used your product for all of their needs — this should represent many billions of dollars in revenue potential. If you’ve priced your product in a commercial deal at the low end to get your first few customers then for this reason, this could come back to haunt you.

4. A path to significant recurring revenues

Let’s say you have six similar profile customers. Four are less than three months old and are still trying out your product, paying $2K MRR but two are six months old have been upsold and paying $10K MRR. Even though that’s “only” $28k MRR, that’s a strong indicator that you have a valid land-and-expand model that is working. If you can show growing product usage in early customer cohorts, then that’s even stronger. I also suggest tracking your “fully-ramped ACV” per customer, i.e. how much ARR a customer could generate when using your product for all their needs.

5. A sales machine and growth engine for acquiring customers

You can show you know how to acquire more customers through pre-scale agreements and predictability on the sales cycle length to convert them to commercial sales. Having 8 customers when you close your Series A means investors believe you can grow to ~24 customers in a year’s time (3x YoY growth is typically the target for early stage). So to get those additional 16 customers, you’ll need to show that you’ve identified channels and activities and are closing around 1–2 new deals per month now.

One thing we know is that there is no one size fits all — so take the above for what they are, a set of directional guidelines. Some founders may be able to raise a Series A round with a handful of low commercial value POCs. In 2018, 22% of SaaS companies raised a Series A with $0 ARR. But that’s definitely the exception — so for the other >95% of founders out there, it’s incredibly important to have a commercialisation mindset at the earliest stages of company building.

As an early-stage VC that invests across a broad set of sectors, the lool team continually meets with our extensive network of US and Israeli follow on investors. Not only is this important for getting our portfolio on the radar of potential investors — but this also allows our portfolio to build an informed, “crowd-sourced” view of what Series A metrics they should be working towards. So lean on your investor here to build a similar picture.

To get the best Series A outcome, you will want to create a competitive environment with multiple term sheets so you can choose your preferred partner. The best way to achieve that is by ensuring you’re appealing to a broad set of investors by mitigating against every “risk” factor, i.e. scoring high in as many of the five boxes above as possible.

Executed well, your pre-scale go to market strategy isn’t why you were able to raise a great A Round. It’s the reason that your business was able to find product market fit so rapidly. It’s how you were able to build a strong foundation for growth which helped you successfully avoided the POC death trap. It also made you hugely attractive to investors and that’s why you were able to raise an awesome A Round.

If you’ve any thoughts on this topic, have a great caption for the above image or are an entrepreneur working in this space — then feel free to be in touch on LinkedIn, Twitter or tony (at) lool.vc. To keep updated on company company building resources like this, follow me and looktalk on Medium and subscribe to our newsletter.