Why it's hard to answer “when to raise a series A”
blog.ycombinator.com
blog.ycombinator.com
Generally your series A investors will, between them, hold a majority of shares in your company. If you have enough leverage to retain a majority share for the founders and employees, you're probably already funding at least part of your work from revenue. In that case you may not desperately need the investment.
Before you raise a series A round, be sure you understand the meaning of "Participating Preferred Shares."
Don't celebrate getting a series A round by using some of it to buy fine wine (unless you're in the wine business). You wouldn't celebrate getting a payday loan either.
And the beat time to raise an A round is when you don't need the money but you can grow faster I'd you have it.
The tension that investors look at between time to executve and how much progress has been made is really interesting. Is the the time horizon (and thus expectation) very different for different industries? Is it relative to existing incumbents and competitors?
One would think that such a company can turn around and more easily become successful than a company which has only an MVP that generates no money, but that’s not how VCs see it. They want to see “traction”, and even better, a company amassing users like wildfire.
Twitter had no revenues for years but was raising at a $100M+ pre-money valuation because of user growth alone.
If Twitter had added a business model and generated revenue but didn’t have the hockey stick 5 years in, then VCs would actually be more averse to invest in it.
Already having a userbase, revenue, a team, etc. in place is a massive advantage, because these things are so hard to accomplish. If you tell the right story, you should look infinitely better than an early stage company that pivots due to lack of traction (and the latter get funded all the time).
Companies are usually judged relative to expectations in their field. This goes for founders as well, who are judged relative to everything else the investor has seen.
But once someone has PMF, the question shifts to: "How quickly can the business grow and how large can it get?" The goal for most earlier stage VCs is to find companies that can scale to $100m+ in annual revenue in less than 10 years. If a company is at $500k ARR and tripling, then you can draw a path to it hitting $100m ARR eventually (e.g. triple annually three times, then double annually three times). But if the company is growing at 30% or 50% per year at $500k ARR, then it's nearly impossible to make a path to $100m+ ARR. It would take a company at $500k ARR and 40% annual growth over 15 years to hit $100m ARR.
To address the question of expectations in different industries: I'm always thinking about the path to $100m ARR. If an industry take a while to break into but then revenue can ramp up more quickly, that's okay. But the path needs to be there and work on the time scale of a venture fund (~10 years).
I've never had any success with getting institutional money at the seed stage, but if you do get it, it's even easier to bypass some of the troublesome checklist items you get in the A round.
I know some people might think the payout could be better raising series A and hiring to support growth as is the more common road. The founders are going a different route and so far it's going well. We can hire when we need to so not to worried there. I don't know if this is a weird case?
Series A and later are really helpful in growing quickly. You should raise a series A when it will give you a lot of growth per dilution -- that is, when you have a clear plan for how the money will help you grow quickly, and some evidence that your plan will actually work.
> Because most venture returns are driven by a tiny number of companies, investors know that they need to invest in those companies in order to make money.
The trick, then, is convincing investors that your company will be one of those outliers.
The missing part in this article about "when", imho, is that _when_ might have a lot to do with the timing of a startup's outlier story and how well it matches with a particular VC's fund size.
IMHO the series thing is outdated. Just call it R0, R1, R2, R# where # is round number and be done with it... or move to a continuous fine-grained fund raising model.
Is that intended to say failing or falling?
(Some VCs are perfectly happy to let you run low on funds to get better terms).
Any pointers on the most polite but firm way to defer speaking with investors when you're not ready to raise?
We just raised Seed, and get 5-10 inbounds per week asking about Series A. I usually write something like:
"Thanks for the note. We recently closed our seed round and are not looking to raise at the moment. But we will definitely reach out when that changes."
Hopefully that's not too curt/dismissive? Thanks in advance for any tips.
"...this doesn’t provide the sort of certainty I know founders want in answering the question of when to raise. However, I think that knowing that there is no clean answer is important because it provides a framework for thinking through the relative advantages you have when thinking about a raise."
About a year ago, I had this inescapable feeling that I was spending my time poorly (not daily productivity but on a larger scale), and it was causing me a lot of anxiety. Then I read How Will You Measure Your Life? by Clayton Christensen. I walked away with a framework for finding out what I want to be productive towards, even though that thing -- whatever it is -- was no more clear to me. My anxiety disappeared, which is what I wanted all along!
For the better half of these businesses, this ends up being ok. They settle into a slower growth model that produces a great cashflowing business. However there are others who are unable to get to profitability on remaining funds and die as a result of not having enough capital.
I'm always amazed how much it takes for people to say pretty simple things.
"more young, charismatic ivy league graduates" is not at all what the author describes. The author's thesis is that raising a Series A has requirements ranging between a Seed round which is based on, "the quality of the founders and the raw story that they can tell about their company and the future that company will create" and a Series B which is based on "[the] need to have accomplished a significant set of things that prove their ability to accomplish that future".
Be that as it may, if you're one of those people you can use it to your advantage and get away with less traction.
Your poor conclusion of "ivy league grad" is ridiculous. If anything YC looks for doers not those that have.
Please be aware this is your bias, your POV. You can't use it to prove your own point.
PhD is nothing similar to your connotation of Ivy League grad. The former requires years of sacrifice, ruined relationship, and missed experiences to master an esoteric part of science. The latter has the connotation of privilege.
Being charismatic isn't entirely unrelated to one's ability to lead a company. You don't have to be slick, but projecting enough charm that people don't wander off while you're talking helps with hiring and sales.
You can learn to be acceptably charismatic if you put some effort into it. If Bill Gates and Jan Koum did it, you can too.
https://en.wikipedia.org/wiki/Tautology_(logic)
https://en.wikipedia.org/wiki/Contradiction
Is the teaching of propositional logic common in the US?