Modsy 3D rendering

Getting from Seed to Series A

By Jared Hyatt

During the first half of 2015, Norwest launched a dedicated seed program as a new channel for reaching early-stage entrepreneurs. Our goal is to work closely with the founding team and provide as much value as possible as they build their companies, products and business models.

Today, the Norwest Seed Program ensures we get the opportunity to deepen our connections with management teams and companies before the Series A round.

When interacting with potential seed investment founders, we are hearing the following question from a number of them:

“Since the goal is to lead the A, what metrics do we need to achieve before you’re willing to do so?”

Great question.

And a natural next question would be:

“What’s the advantage of working with a larger fund early on if you’re going to require the same diligence process as other firms down the road?”

The best way to answer these questions would be to share a real example from the Norwest seed program. I hope the rest of this post helps clarify with the following case in point:

Last week, Norwest portfolio company Modsy launched publicly. Modsy is an exciting new company that combines interior-design visualization and e-commerce to vastly improve the way that consumers currently design and shop for the home. We first invested in Modsy founder Shanna Tellerman with a seed round in March 2015. Nine months later, after working closely with Shanna and the Modsy team, we led the Series A.

Why did we lead the round? For several reasons:

  • Industry Expertise: In this case, we were already very familiar with the space (link to blog).
  • Founder’s Ability to Execute: After eight regular investor updates and many other discussions focused on product, hiring, and strategy, we loved what Shanna was doing. She was very deliberate with user testing, the product continued to evolve and the technology was achieving step-function increases in capacity.
  • User Testing: Customers love the product. Shanna shared the results of the monthly batched user tests (small groups) and across the board users loved Modsy.
  • Market Opportunity: The space was heating up and gaining resources. Due to our familiarity with the sector, we knew the other companies, their approaches and their funding levels. And while we admired Shanna’s deliberate approach to company building, we asked her what she needed to achieve her plan faster.

So what were the metrics we saw to give us the confidence to invest in the A?

We typically look at metrics in three areas:

1. Do your customers love you?

  • This can be measured various ways depending on your product/business: NPS, retention, engagement, spend, clicks, etc.
  • In Modsy’s case, NPS started out high and continued to grow.

2. How well do you listen to your customers?

  • How are you testing to gain feedback from your users and what are you doing with that feedback to improve the product and user experience?
  • In each batched customer test, Modsy tested a specific hypothesis, then incorporated the insights from that test into the product before releasing the next version for testing.

3. Do you know where and how to find your customers?

  • This is typically the fuzziest metric for a seed. At this point, we want to know that you’ve been thinking about where and how to acquire customers, but we do not expect you to know the customer acquisition costs. We do want to know that you’re thinking about how the model scales, and that it will continue to make sense. If you can only find a small group of very expensive customers and your model suggests each customer’s life-time-value (LTV) is lower than the customer acquisition costs, it’s unlikely that investors will consider you ready for a Series A.
  • Modsy garnered enough initial interest from its launch press to fill its early pipeline. As Modsy let in additional customers to its beta, it built technology to allow it to achieve step-level functions in capacity. Modsy was learning the incremental cost of each user, and identifying ways to bring down those costs. Additionally, early experimentation with ads and channel partners helped demonstrate where and how Modsy believed it could cost-efficiently acquire users.

Achieving Validation

Another metric is monetization. In the case of Modsy, the company hadn’t expected to begin monetizing users until January 2016 but in October 2015, Modsy customers made their first purchases within the product. Modsy was well ahead of its schedule, proving that its early stage product could achieve its aim. By allowing customers to visualize pieces in their own spaces, it gave customers the confidence they required to make a purchasing decision. So today Modsy provides the links to purchase the pieces customers want.

There is no definite set of criteria a company can aim at to ensure its likelihood of securing Series A funding. But when an entrepreneur elects to partner with a larger firm, rather than say, with your Aunt Tilly, the hope is that we will help you focus on the most relevant metrics that demonstrate the progress of your business, and by doing so, you’re more quickly positioned on the path to achieving a Series A.