What do you look for in a Series A?
Every couple of weeks, an entrepreneur asks me this question to better understand what he or she should be doing to best set his or her company up to raise an A in the future.
Overall, there are few things I would advise an entrepreneur do to optimize for fundraising; rather, I would suggest making decisions that are optimal for the business. If executed well those decisions will improve fundraising success as a byproduct.
Though some of my suggestions can vary based on the sector and business model, others are more generalizable. I wish someone had conveyed these to me when I was an entrepreneur so I’m sharing over the next few posts in the hope that others find it useful in thinking about how to build their companies. In addition to what is often discussed — product market fit (i.e. building a product customers want) —I’ll outline 3 tenets necessary to raise a Series A.
The first is to prioritize sustainable revenue.
I’ll focus on this for the rest of the post. The other two —scaling team & positive economics — I’ll dive into in future ones.
As an entrepreneur, it felt like booking any revenue, even if it was for one time services rather than for our core product, was an achievement. For example, in a SaaS business, a customer may be willing to pay $20,000 for customizations to the product instead of the off the shelf offering. In a consumer marketplace, a power user may request a more heavyweight analytics dashboard that is too complicated to be useful to most other users.
I remember thinking, so what if it will require a bit of custom work or if it is not sustainable in the long term, someone wants to pay us so how can I say no?
In reality, every decision requires a trade off and it is important to evaluate what the opportunity cost of this specific one will be. That short term revenue is detrimental to the long term success of a company because it takes away focus from the core business — delaying product development, losing sales focus, and confusing the team.
As an investor, I look for momentum and sustainable future growth. The entrepreneur needs to have data points that show up and to the right progress, and I need to be able to extrapolate that continued trajectory. If revenue and/or engagement is lumpy or if it comes from one off sources that are not repeatable over time, that is a harder story for me to envision than one where there is growth within and across customers over time and a proven, repeatable process to acquire and convert them.
This is also the goal of an entrepreneur, so he or she can build a sustainable business that scales. Private and public investors value these companies more highly, and emotionally it is a more sustainable business to run than one where its unclear where the next dollar will come from.