“So, You Want To Raise Your Series A?”

As a very early and active pre-seed, angel, seed, or whatever-you-want-to-call-it investor, I view my main job is to select companies and founding teams that will eventually go on to raise a proper and priced Series A round from a credible firm, with a partner from that firm joining the board. In some cases, you find a young team who you just know will make it — more often than not, you have to be imaginative and allow for time to help products, markets, and people grow. People can definitely surprise you with their learning pace and drive to succeed.

I often joke that in today’s frenetic seed environment, many founders view “Getting To Series A” as post-college grads may view law school or getting an MBA as the next step along an academic journey. Since I am not a Series A investor — but rather someone who tries to help Haystack seeded companies work toward a Series A — please read the following post with the context that I want to help young companies reach this milestone, but from my conversations this summer with a variety of Series A VCs across the country, I am predicting the seed explosion of the last few years have finally worn down professional VCs to the point where the environment and attitude toward putting together an A round has — in my opinion — changed significantly.

Don’t kill the messenger. I’m writing this so early-stage teams have fair warning. For the record, I am passionately optimistic about the long-term future of and impact of technology on society at large and continue to invest early and often. The following is food for thought for those seeded teams who have true ambitions to partnering with a bigger VC and clearing the Series A hurdle:

(1) Hit the ground running by no later than Labor Day. You may have heard that “deals happen all the time.” Sure, less so for the hotly contested A’s and B’s. Folks pitching want all the big firms to be around and in the flow, and September is a great time. It’s hard to start a new conversation for an A once mid-October rolls around, though of course a deal could start in this window but require many weeks to close. Timing matters. There is a somewhat immutable seasonality to VC investing, despite what others may chatter about.

(2) Be precise with your introductions. Create a spreadsheet with specific VCs. Figure out if they’d be interested in your company and space. Be targeted. Find someone in your network to give you a warm recommendation — not just an intro, but a recommendation — to each target. Run a process.

(3) Clean the notes and caps before talking terms. In a frothy seed market, founders have been able to play all sorts of games with stacked notes, different caps, and deciding to set valuation caps at whatever the seed market would bear. This all could result in a founder finding him/herself in a Series A discussion where the investor, upon discovering the messiness of the notes and the higher caps or even prices could lead to awkward conversations and even drama. Look at this thread with three experienced seed and VC investors. They’d rather pass on the risk of drama or cleaning up a mess with so many fish in the sea.

(4) It’s not all metrics. Metrics open the door, but people close the deal. People get so wound up about metrics and it lulls them into a false sense of security. Linear progress is hard to achieve in any new endeavor, but big VC firms are looking for breakout potential. The metrics help demonstrate that the team cares about them, knows how to record and read them, and proves (a little bit) that the team can get things done. Metrics help ground what may otherwise be an abstract pitch, but personnel and vision help seal the deal. See below.

(5) Executive teams matter a great deal. A big VC wants to know who the CEO can recruit around him/her. Selfishly, the VC may not want to help build the entire executive team and would rather find one intact and what’s working. Having a missing piece among a team is one thing — not having a COO when the business is moving so fast adds a layer of risk in a fragmented talent market that could push a VC to favor an opportunity with a more fully-baked team.

(6) Long-term plans and ambitions matter. I heard a great quote this past week: “Clearly articulating a long-term vision is actually a differentiator.” Big VCs will absolutely evaluate whether the founding team wants to go for a big, big outcome — they cannot afford to have a $200m exit, even though it sounds nice. It will happen more and more, but VCs want to at least protect against it.

(7) Whatever funding habits worked in seed will likely backfire with the pros. Oh man. This is where it gets hairy. In seed, founders can set caps; at Series A, the market sets the price, and oftentimes it’s a real negotiation with an experienced VC. In seed, a round can stay open for ever at the founders’ whim; at Series A, within 2-3 weeks a founding team can see their deal momentum slip away on short notice. In seed, founders can dictate how the round closes; often at Series A, the firm coming in (who will likely have a board seat) has significant control on the close, as well. It all sounds more like a partnership, right?

(8) Expect VCs to be more valuation-sensitive than the recent past. This is my bigger prediction. Depending on who you listen to, people will say entry price at seed doesn’t matter — instead, just invest in things you think will be huge and don’t worry about price. But, in the last few years, seed investing has exploded, and there are now hundreds of seed stage firms (the stage has professionalized). And with professionalization comes new LPs who have funded these vehicles, some looking for access and everyone looking for returns. Now after over two years of meeting and getting to know LPs, each one asks about the “entry price” in seed, and how that may go up and down. In this “dry” environment of elongated private markets without many big tech IPOs or acquisitions, LPs are now starting to ask funds like mine: “When do you expect returns?”

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Angels are a dying breed. Seed is where the early action is, and much of it is professionalized with other peoples’ money. Hence, it has a business model, and more and more folks are starting to realize what the larger VCs have known for years — it’s often 100x harder to get money out of an investment than it is to make the investment in the first place. The lack of liquidity leads to more awkward LP meetings. The summer slump slows things down. Many bigger VCs won’t admit this publicly, but they’re fatigued with all the notes and structures and crowded cap tables, and that fatigue will likely make them approach opportunities more conservatively. Yes, this will cause some folks to miss things, but this isn’t about VCs passing on things that will work out — it’s about how to go and get a Series A in the Fall of 2015 given environmental conditions.

The next Snapchat or company with insane metrics or revenue growth will be a hot deal and get many great term sheets. If you’re Larry Page, you can expect to get term sheets from everyone. But, if you’re not Larry Page, it will be harder, and it may be wise to expect a more sober valuation, or perhaps a valuation that even lower than some of your caps. Unless investors get conviction you’ll IPO or lead to a huge outcome through sheer will & determination and dominate a huge market, they will keep looking for one that will — and keep telling you to come back when you have more to show.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus