On Monday 8th April Smedvig Capital and Episode 1 co-hosted an event delving into the process of raising Series A. Smedvig’s Joe Knowles answered questions from Episode 1’s Siobhan Clarke giving insight and advice on the move from Seed to Series A including when to raise, how to prepare and what to expect from the diligence process. See below for a snapshot of the questions answered:
What is a ‘Series A’?
It varies but it’s usually the second institutional round, with a new institutional investor. 60% of UK ‘Series A’ deals are between £2–6m and the median round size is ~£5m. Today there is a small cluster of ‘New Series A’ emerging in the £6–12m range but these deals are relatively rare still and often involve a Seed extension prior to the Series A.
How do you get there?
Around 25% of companies that have raised seed since 2013 have since raised Series A. The average time between Seed and Series A is 18 months, 1/3 of businesses do it within 12 months and 50% will take 12–24 months. Typically these businesses have raised £2–3m in total prior to Series A.
How many companies do Smedvig see per year and what does the investment process look like?
The best way to explain this is to share our funnel (left) which shows how we think about the deal process from first interaction to closing a deal. We receive 800 opportunities per year, from which we take 100 first meetings and offer roughly 5 term sheets. Of those, 2 -3 are accepted by founders and ultimately close (our conversion from offer accepted to close is about 100%).
The journey from first meeting to term sheet is a continuous process of dialogue, data sharing, product demos and meeting the senior team. The two main milestones are the “one-pager” where we discuss a summary of the business internally and the “multi-pager” where we discuss an investment proposal and agree to make an offer following the founder presenting to our investment team.
The fastest we could go from first meeting to term sheet would be 2–3 weeks, but it’s probably more like 4–5 weeks on average. In practice, all the companies we have backed, we were talking to over a 2 -3-year period before we invested.
How has the market changed for Series A investors?
Five years ago deal sourcing was mostly inbound, but today about half of our deals are referrals from early stage funds, 25% is outbound, (cold e-mails that we send to businesses in sectors that we’re interested in) and the other 25% comes from our website and LinkedIn. The process is competitive for VCs. Last year there were around 160 unique lead investors for roughly 250 Series A deals in the UK (according to CrunchBase), meaning VCs must work hard to differentiate themselves. Some try to win deals by moving fast, others by building relationships with entrepreneurs over a long time or by finding ways to add value.
What proof points do you look for at Series A?
For us, Series A is all about moving from proof of concept to product market fit. We like to see a clear articulation of the ideal customer profile, the pain point being solved for that customer and why this product is a step change better than alternative solutions for the specific customer problem. We need this to be backed up by multiple consistent examples of similar customers buying for similar reasons and use cases.
We evaluate companies against 6 areas:
2. Product differentiation (how real is the problem, how much better is the solution)
3. Product defensibility (why will the solution remain the best)
4. Market size (in the proven market and adjacencies)
6. Business model and unit economics
Companies typically need at least £1m of annual run rate revenue before there is enough customer data to demonstrate product market fit. Growth is another useful high-level indicator. Absolute growth can be misleading, so we look closely at the efficiency and sources of growth.
What should the team look like?
Team is one of the most important elements at Series A. Businesses move from having a founder to the foundations of a C-Suite team. Who should be in that team varies from business to business and we don’t expect a full team at this stage, but a few key hires are vital to demonstrate the CEO’s ability to attract and retain high calibre senior leadership. We are more interested in seeing one or two high quality hires, than needing to see specific roles filled. In my opinion, people often don’t hire a CPO soon enough.
How should you prepare for raising Series A?
Most importantly make sure you understand and can articulate your customer profile, your proposition and your product market fit inside out. Make sure you have runway — you have the time pressure advantage, until you don’t. Start the process earlier than you think you should. Lastly, try to create FOMO where possible. The best way to do this is by having a great business with strong metrics. Then make sure you are talking to 5–10 VCs in advance so you can get competing offers at roughly the same time.
Should you continue conversations with investors between rounds?
I think it’s always helpful to, yes. Identify a small group of investors that you have a good connection with and who liked the business when you last spoke. Having these relationships might shorten future fund-raising processes, which is always useful as it means you can spend less time worrying about raising and more time focusing on your business.
What are your two pieces of advice for all companies looking to raise Series A?
Firstly, know your use case and be able to articulate your product market fit — it’s often too vague. Secondly, do diligence on your potential investors, it could be a long partnership and you want a strong relationship with a VC who will be there through the ups and downs.