Being Creative When The Series A Doesn’t Arrive

Last weekend, I wrote a post about the journey of getting to Series A, and I was surprised by how widely it was shared. It’s a testament to how hard Series A rounds are relative to the number of seeded companies out there. But, many also perceive the A round to be the only option, where in fact, there are other options depending on how creative the founding team is. Paul Martino from Bullpen started to write out the options in this great post, and I wanted to add to them as I’ve been thinking about how one could be creative:

Equity Crowdfunding: Get thee to AngelList, or see if Funder’s Club or a similar vehicle would be interested.

Second Seeds, Seed Extensions: Hunter Walk from Homebrew wrote a post on “three types of second seeds” a while back, as usual a good, quick primer for what founders should expect and how investors perceive these rounds. While there are diamonds in the rough to be found, and while we can argue every point about why these happen more frequently, at the end of the day, the reason these rounds are hard is for one simple reason: Losing momentum is a bitch. Momentum is very hard to capture in business, and going out for a seed extension or second seed

Going Right For M&A: This is a hard one because so much of being a founder is determination. I recently met with a founder who has a great product and team, was seeded nicely, but that will not (in my opinion) ever raise a proper A. I told him to sell, recoup, and then get ready for the next startup. I was nervous to convey this to him, as I recognize the sensitivity of the situation, but he listened and eventually remarked that many of his advisors and a few VC friends hinted at the same thing. Now with some dough in the bank, he can start those M&A discussions, take care of his cofounders, and be a sober steward of the lives he’s steering in his current company.

Debt? For some companies which have revenues and/or sales bookings but need some runway, if the numbers add up, there are lots of firms who specialize in debt issuances, though these should be explored carefully as the terms and ratchets are

Going For The Pivot: A few years ago, I wrote a post called “Reinvention and Re-rolling the Dice,” which was inspired by this tweet. In an age of hyper competition in startups with few or no barriers to entry (and often little technology advantages), a lot of startups are unknowingly gunning to be #2 in their category. Why not try something new? Yes, it is hard and getting over sunk costs is hard, but sometimes necessity is the mother of (re)invention.

New “A Round” Players: There are all sorts of groups now leading what could be called Series A deals. They could be companies, smaller funds which have leveled up to bigger funds, entirely new funds backed by new money, spinouts from bigger VC funds, hedge funds or larger funds who “move down the stack,” and so forth. I’ve noticed more and more “new Series A players” who pop up in Term Sheet and StrictlyVC every morning. Many founders get suckered into thinking the big branded firms are the only ones to go after, and while they’re undoubtedly great, they are not the only shops one should consider.

RIF: The dreaded reductions in force, the quick fix to increase runway. Those are coming. There are lots of startups only backed by seed-level funding that are burning well over $100k/month. Stay tuned.

Chasing Revenues: We are past the Zuckerberg-age of audience aggregation at all costs. VCs have shown a desire to fund these types of plays once they’re already working — but while some folks will get seeded on talent or reputation, it’s much harder for a bigger VC now to commit to one or more rounds of funding to an endeavor that doesn’t have a clear path to revenue. I assume most know this by now, but just in case.

Ultimately, the choices seeded founders face before the A (or if it doesn’t happen) revolves around the tension of death versus dilution, aptly summarized recently by Josh Hannah from Matrix. In his post, Hannah writes:

I believe many founders are too worried about dilution from follow-on “up rounds”, and should be more concerned about running out of money.

This is the existential threat, right in our faces. This is where seed-stage founders and investors have to be creative, determined, and hustle. And, not only will most not do it, many will not even realize the runway is shortening before it’s too late. It’s easier to work on product features versus getting out of the office and banging down the door to ink a game-changing distribution deal for growth. In the end, while not perfect, the whole seed-to-Series-A process is much more efficient than most people would like to admit. The ones that make it there often benefit from a mix of timing, luck, and proper planning. And, for those that don’t, there are other options, and those options will ultimately test who is in it to win it, who is in it for the right reasons. Raising the seed was easy. Let’s see what happens next.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2018 Semil Shah.

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