How to Raise a Series A Round

Justin Kan (@justinkan) is a Founder/angel investor/former VC who we’ve covered here before (on how to raise a seed round). This go round, we’re focused on Justin’s insights about the Series A fundraising process. Insights that he put down in The Founder’s Guide to Raising a Series A Venture Financing a while back. In the interest of time, we’ve distilled Justin’s 13-minute read into a 3-minute one, adding some of our thoughts on How to Raise a Series A Round.

When are you ready to raise a Series A?

Justin: “You have something that works, and all it takes is pouring money on it to grow it much, much bigger.”

What do VCs want?

Justin: “The venture capital model is such that they are incentivized to want to invest in businesses that can be worth $1, $10 or $100 billion dollars and in a single stroke return multiples of their fund. This is not a moral judgement, this is structural to the venture funds.”“VCs do not want to invest in businesses that are creating steady revenue, growing 20% a year. If you have a linearly growing business, venture capital is probably not a good fit for you.”

Bigfoot: When engaging with investors of any type, it’s paramount that you understand their objectives. They differ dramatically across investor types (angels, VCs, lenders, banks, friends and family) and to a lesser degree across the individual investors within those groupings. We’ve written about this here.

How is raising a Series A different from raising a seed round?

Justin: “In a seed round, you can raise money incrementally, which makes it easier to build momentum. … In a Series A, you need to convince an investor to lead your round, which is a much higher hurdle to get over.”

Bigfoot: There’s a lower bar for raising a Seed round than a Series A round. Venture capital has a funnel. It’s broadest at the seed stage and whittles down from there as the top performers get follow-on capital from existing and new investors. The checks get bigger and so do the requirements and expectations.

Start with a narrative, not a deck.

Justin: You’re telling a story. “The narrative is a story you tell through conversation. Getting the right narrative is the most important part of the pitch process…So, have a lot of conversations and iterate until you have it perfected.” Then build your deck!Narrative structure:

• The world is a certain way
• Something changes
• The world is now different

Bigfoot: Justin goes through this in some detail, so we’ll simply say that we agree. The deck is a tool to share your story, but the words coming out of your mouth and the passion and convincibility with which you convey them are what really matter.

The Series A Fundraising Process (7 Steps to Money)

We don’t have a lot to add here as this is the standard process for raising institutional Series A venture capital.

Step 1: Setting up initial meetings

Justin: “Lots of founders make a mistake here and meet with VCs linearly, because they don’t take a systematic approach to fundraising. This is a problem for two reasons”:

1. Maximizing your distraction: “It is very distracting for you as an operator, because you are always spending a lot of mental energy on thinking about fundraising.”
2. Limiting your offers: “If you do get a term sheet from one investor, it is hard to parlay into other term sheets, because you won’t have other investors on the verge of wanting to invest in you. Also, when you have one term sheet you will be tempted to accept it and your leverage to negotiate will be much lower.”

Bigfoot: This is the qualification stage of your capital raise process. You need to be diligent about building a targeted list with enough capital prospects and then be intentional (and creative) about how you reach them.

Step 2: First Meeting

Justin: “The important point here is that you need to get a conversation going that roughly follows your narrative. This is where all the time you spent practicing will pay dividends.”

Step 3: Multiple Partner Meetings

Justin: “As a general rule of thumb, if you don’t hear from a firm for longer than 48 hours [after the first meeting] they are not interested. Getting you through the process is a priority when making investments, but telling you no is not a priority.”“[If you do hear back] Your next meeting will generally be with the partner you talked to and one to three other partners from the firm. The point of this meeting is for your main partner to get other opinions and feedback on your business.”Two paths:

• Moving forward: “If the partners you meet with are excited, they will email you to schedule a meeting with their full partnership.”
• Stalling out: “If they aren’t sure, or aren’t as excited, there may be intermediate steps. Often they will want to schedule additional meetings with several partners or industry experts who are close to the firm. This is often where deals peter out and lose momentum.”

Step 4: Full Partner Meeting

Justin: “The partner meeting is the final step to getting a term sheet from a VC. Usually this will happen on a Monday (when most firms have their day of partner meetings)…The partner meeting itself can be very intimidating. After all, here are a bunch of people who have funded multi-billion dollar companies, have way more experience investing than you do, and are probably worth a lot more money than you are!

Meeting Prep: “[That said] It is simple to prepare for your partner meeting. You should schedule a meeting with the partner who is championing your deal, walk him through your deck, and specifically ask what objections his partners are going to bring up and what their biggest concerns are. Then, go home and make sure you have 100% rock solid answers to those questions and objections.”

Step 5: Term Sheet

If there’s interest after the partner meeting, you’ll get a call with a term sheet coming your way shortly thereafter. If you did not make the cut, you may be ghosted.

Justin: “[Assuming you’re selected] Then they will give you a term sheet that outlines the major terms of their proposed investment, things like amount invested, valuation and board control. It will also have a no-shop exclusivity period.”“Here it becomes clear why it is important to have your other potential investors at the same part of the funnel. If you do, you can immediately call the other potential investors, and tell them that you have a term sheet from someone (don’t say who), and put pressure on them to give you a term sheet.”“You don’t have to sign it immediately and I would recommend that you do not. Before you sign a term sheet with anyone, you should ask for references from companies they have already funded. Remember that this is a person involved in your company that you can’t fire, so you had better pick wisely.”

Step 6: Diligence and Close

Justin: “Once you sign a term sheet, you now lose all leverage. Any momentum that you had during your fundraising process will be hard to pick back up if for some reason this deal falls apart (investors, like most people, have relatively short attention spans). Expect to spend two to six weeks in diligence.”

Step 7: Get Money

Justin: “That probably 1) took longer than you thought and 2) was more of a pain in the ass than you’d anticipated. Remember that when you are spending the money…If you are spending the money on something that doesn’t make your business much better, consider not spending it on that thing.”If you’re a SaaS Founder with traction raising a Series A round, feel free to reach out to us.We may have a direct role to play in helping you take less dilution and get your round closed efficiently. Or, we may just be able to make some intros to VCs we know and help broaden/accelerate your process.