54. The Path to Series A, Part 2 (Semil Shah)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Semil Shah of Haystack joins Nick to cover The Path to Series A, Part 2. We will address questions including:

  • Semil Shah Series A Part 2We are all looking for great founders and teams at the seed stage. What additional team dynamics and construction may A round investors be looking for beyond what’s required at seed?
  • What exit outcome potential do A round investors require and how does that impact the way entrepreneurs should frame their pitch at this stage?
  • What is the biggest difference in the fundraising dynamic between Seed and A and why does the leverage shift during the negotiation?
  • How are LPs impacting the price VCs are willing to pay and what macro trends are causing this?
  • It seems your approach is unique from other investors…. what do you do differently w/regards to helping your portfolio companies on the Path to A?
  • Any other thoughts or advice for investors and entrepreneurs trying to obtain Series A funding?
  • There was an article from Sequoia about their scouts. Related to that… do seed investors partner w/ series A investors?

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Key Takeaways:

 

1- Rifles over Shotguns

Samil talked about how it’s best to have a targeted short-list of preferred Series A investors that a founder should want on their board for the long haul. Approaching this round in a targeted way shows an ability for precision-like thinking. A desire to minimize time spent b/c the founder’s time is better spent elsewhere. And it demonstrates that the founding team is willing to do some homework earlier to find the most suitable partner.

Creating a google doc of 100 investors that the startup is trying to get introductions to, is a clear signal that the thought process and approach are off. Treating this like a common application to college shows that the entrepreneur does not realize the importance of fit and that this institution will be tied to them and associated with them for many many years.

And prior to making a seed investment Semil monitors if:

  1. They have the desire to go down the VC fundraising path
  2. They have the maturity and intellectual curiosity to go do it

 

2- Rolling Closes and Stacked Notes

Today we talked about the rolling close, stacked notes and the problems they create. We’ve all heard the terminology from entrepreneurs. “Well, first we did a friends and family round, followed by an angel round, then a pre-seed round, then our formal seed round and now we’re doing a seed-extension.”

Not only does this undermine the stability of the company, b/c the cap table is a mess, but this also undermines the decision-making process of the entrepreneur. If the company is being put at risk with multiple tranches of stacked notes at different caps… what other suspect decisions are being made that may compromise the business? Samil mentioned that some A investors are willing to help fix the cap table, but most will not even engage until the founders have recapped the previous rounds and streamlined ownership.

 

3- Team, Vision, and Metrics… in that Order

Samil stressed that professional investors will still emphasize the importance of team first. VCs want to work with people they like, that they are inspired by and, ultimately, can learn from. After that, the market potential and vision of the startup are critical. Here Semil cited Chris Dixon’s excellent article, The Idea Maze, where the founder walks him through this labyrinth of how they’ll get from A to B.

And with regards to the numbers, he said that the metrics disprove delusion. Of course, it depends on the sector and company type, but the metrics should substantiate the story. If the numbers aren’t supporting the vision, then delusion may be proven.

And recall that Semil stressed the importance of progress. Many Series A investors will ask when a company was founded because they want to see strong momentum and progress. If the company has been around for a long time and hasn’t hit their growth curve, they may be looking for the milk carton expiry date.

Tip of the Week:   Lost Leverage & the Captains of Crunch

 

FULL TRANSCRIPT

 
   

   

Listener Feedback

Pete Maglio

The takeaways to end this episode are fantastic! Thanks @TheFullRatchet & @BenEinstein! pca.st/Fey4 #smartHardware #startups