Series A metrics (spoiler, it’s not always about metrics)
Written by Shawn Chance, Partner, OMERS Ventures
The question that I get most frequently from early-stage founders is “what metrics do you look for at Series A?” and often, “how much revenue do you look for at Series A?”. These are great question that can be answered in as many ways as there are VCs in the industry writing checks. In fact, my partner Laura Lenz has written previously about some of the key metrics we typically look for in a company seeking early-stage investment. You can check out her post on revenue per employee here.
But an investment firm is made up of individuals who (well, certainly in our case) share common values and are aiming at the same North Star, but who each have their own path to where they are today, and make decisions based on past experience, whether we like to admit it or not! My firm view is the more transparent we can be about our own investment criteria, the better every conversation is. So, why not share the answer I typically give to any founder who asks this question?
In the old world (before the pandemic), it was a widely held belief that “about $2M in ARR” (or run rate) was the benchmark for a tech company to be Series A ready (disclaimer: there are exceptions based on types of business and business model). Since then however, we have seen companies raise A rounds with significantly less revenue than that. Have the goal posts moved? The answer which may surprise you is: not really.
Let me first tell you that I’m not a fan of using revenue (run rate, annual recurring revenue, monthly recurring revenue or any topline metric) as the primary foundation for early-stage financing. I think of it more as a data point that might (but does not necessarily) serve as a trailing indicator. What I am trying to ascertain when looking at a pre-Series A company is company- readiness and scalability. To evaluate this, I am actually more interested in understanding product market fit (or PMF) than revenue. Although useful and important to track for early-stage founders, anchoring a Series A financing roadmap to revenue can actually signal a false positive on product market fit, and I have seen firsthand how using revenue as a proxy for PMF can lead founders astray from a strategy perspective (after all, startups live and die by their ability to raise the next round of financing). In other words, revenue does not equal PMF.
Here are 3 important questions I am looking to answer when evaluating Series A companies:
1. How, where and to whom do you sell and/or distribute your product?
- Ideal Customer Profile (or ICP): What are the characteristics of the buyer and how well can you describe them? The best early-stage companies have a laser focus on who their customer is, but more importantly, who their customer is not, which drives most of their sales effort. This doesn’t happen overnight, and companies don’t necessarily launch with an implicit knowledge of their ideal customer profile. Often, it’s a “test and learn” approach which yields the insights that ultimately lead to defining customer segments and ICP.
- Sales motion: Do you sell direct, through channels, top down (targeting C-suite execs) with a traditional enterprise sales motion, or bottom up (targeting hands-on developers or functional operators) with more of a product-lead growth approach? I cannot overstate the importance this has on several aspects of early-stage businesses, from how products are built to how teams are designed.
- Customer acquisition strategy: Many great founders (or founding teams) can brute force their revenue to well beyond $1M in annual recurring revenue, simply by leveraging their networks. While this provides a great head start, it can create a false sense of product market fit. The question of how a company will acquire customers at scale is an important one and should ideally be proven out ahead of your Series A. You need to know the answer to the question: “if you put $1 into marketing, what comes out the other end?”
2. What is your product’s true value proposition and which customer segment(s) benefits from it the most?
- Beachhead/focus: The best companies tend to have a relentless focus on capturing a specific segment of the market. This means they’re also having tough conversations with other customer segments and saying no to sales opportunities. While it may seem counter-intuitive to say no to (any!) revenue opportunities as an early-stage company, it’s actually a strong indicator of product market fit as the quality of revenue over time will increase and metrics such as customer lifetime value (LTV), churn and Net Promoter Score (NPS) will tend to be better in companies that show rigour here. Finally, focusing on a single customer segment makes your product and engineering team’s lives a whole lot easier and simplifies your product roadmap so it’s a win/win.
- Present ROI and future value: How is the customer measuring the value of adopting your product? I like to call this the “vitamin vs aspirin” test. Does it save them time, does it allow them to sell new products (thereby increasing their revenue), or does it provide a better experience for a large population of users? Whatever the calculation is that the customer uses when making the all-important purchasing decision, it’s important for you to have a strong sense of it, both for what your product can do today, but also for what your future product(s) will deliver.
- Competitive landscape: As a young company with a fresh product, it can be easy to dismiss competitors or incumbent legacy players. In reality, chances are that you are or will be selling against them and that the customer will evaluate your products, pricing and respective merits side-by-side. The earlier you develop a sober vision of the dynamics at play here, the more effectively you will be able to differentiate yourself and gain traction in the market. As investors, we are innately trained to map our competitive sets and there’s nothing we like more than to see a founder who has a clear and realistic view of their competitive landscape. On the flip side, despite what a founder might think, hearing that ‘there is no competition in our space’ doesn’t inspire confidence. It either means that a market has not been proven or that you are unwilling to see the real competition for what it is.
3. Have you got the right team in place for the next 18–24 months?
- Leadership team: Of primary importance are the functional leaders of the company. Depending on the type of business, key roles usually include CEO and heads of engineering, product and revenue. At the series A, it’s usually preferable for at least some of the management team to have relevant domain expertise to help hack some of the challenges that come with penetrating new markets and building new products. What we are looking for here is ambition, vision and chemistry between the executive team members who will be responsible for driving the business and attracting exceptional talent to join their teams.
- Board & advisory: It’s completely normal to go into a Series A with a very small (and informal) board but a handful of value-add advisors. The latter can be very helpful to an early-stage company, particularly those with deep domain expertise who are actively engaged and can make introductions to partners and customers. As series A investors, we are huge proponents of independent board directors and frequently recommend them as part of our Series A investments. The best founders tend to be good at leveraging their boards and ensuring they are delivering value back to the company.
So there you have it. In my opinion, the greater degree to which you are able to demonstrate the above, the more likely you are to be Series A ready. Incidentally, achieving the above will often result in revenue in the $1M-$2M range but remember that the inverse is not necessarily true.
We’ve created a checklist to act as a quick reference. I hope you find it useful!