Below is the ‘Tip of the Week’ transcript from the Podcast Ep48: Entrepreneur-Investor Fit (Peter Wilkins)
Today we touched on how angel groups and VCs often need to be partners in the funding process. Not just as syndication partners within one round, but also for subsequent rounds of funding. Recently, a few of my portfolio companies have asked me to help them put together a post-seed funding plan. So, these startups have closed their seed rounds and, in addition to building a great business, they need to think about their next capital raise. The following is a list of questions that I send over to the founder:
- How long do you expect the Series A raise to take?
- When do you plan to start raising Series A?
- Do you have a burn-down contingency plan?
- What I mean by this, is if unexpected things happen or the company fails to get traction toward a Series A, there should be multiple pro-formas and plans around spending and headcount that are implemented in such a case. Clearly, this isn’t preferred but may be necessary for survival
- What are the top 3 metrics that you are managing and what level do they need to be at in order have a strong case for Series A funding?
- This question may not be easy to answer, even if the founder has studied expectations in depth, because we can’t predict what specific investors are looking for. And that really drives the next part of my post-seed plan, which starts with a request for the business to list out all the high-level characteristics that describe their startup, including:
- Business Model
- Customer Type
- Theme or Technology Driver
- and any other descriptive identifiers for the business
- For the list of characteristics, I ask the founder to scan Crunchbase and other data sources to find the Series A investors that are most active in their space. If, for example, the startup is selling IoT SaaS solution into the commercial construction industry and they are located in Austin. It’s pretty easy to generate a list of all the active A players investing in SaaS and/or IoT and/or the construction industry. It’s also fairly easy to find out who the active A round investors are in Austin and greater Texas.
- I then ask the startup to make a list of comparable, well-funded companies, that have distinct similarities but may be operating in different markets. This can be helpful for two reasons…
- If the startup can find a business that they aspire to, it’s not that difficult to reach out to their founders and build a relationship. The advice one can get for a comparable business that’s much further along can be invaluable. On top of that, they can make investor introductions, which leads to the next reason for identifying these well-funded comps…
- You now can easily build a very targeted list of Series A investors that understand critical success factors in like businesses and have an appetite for investing in the space.
Once the founders understand where to aim, the process is much easier. Series A investors that have a good reputation and are a strong fit can be pursued. And once the founder has networked into a meeting w/ the A investor, they can find out what they’re looking for. The top 3 metrics or objectives that were mentioned before… maybe those aren’t the top 3 that the investors care about. Maybe monetization is less important than user growth. Maybe customer growth is less important than churn. It could even be a fast, land-grab, winner-take-all situation where the Series A investor wants to get involved even earlier to throw more capital at marketing. The reality is, we can’t all predict exactly what each A investor prioritizes and they may have insight into the business model, growth or otherwise that is necessary for further funding. As Peter discussed in today’s episode, the lesson here is to find the right partners and work with them to understand what winning looks like.