While seed funding is more abundant than ever (the number of seed-funded companies has quadrupled in the last four years), Series A funding is actually harder to get than it used to be. With a super-abundance of competent seed-funded companies, investors can afford to get choosy about their Series A bets.
Many companies want to raise their Series A round before they’re ready, but coming unprepared to such a competitive space can be detrimental to your company’s future funding prospects or even harmful to your reputation. Investors who might have taken your business seriously six months down the road will write you off as someone who doesn’t take being prepared seriously. While there are few hard and fast rules about when to raise a Series A, there are milestones that will help you demonstrate to your future investors that you have traction and a road to profitability. Let’s take a look at four of the biggest indicators that your company is ready to seek its Series A.
1. You have achieved product-market fit
This can be a difficult milestone to quantify, but it’s also an essential factor for any potential investor. Think about it this way: have you proven to yourself—and, more importantly, your customers—that your product successfully fills a real need in a market that is big enough to support your future growth? If not, you haven’t achieved product market fit, and you definitely aren’t ready for a Series A round.
How do you measure this? We’ve found three indicators that are helpful:
Increase in number of users over time
High renewal rates/low churn
Steady stream of customer referrals
Sean Ellis, CEO of Qualaroo and GrowthHackers.com suggests the 40% rule, which says that you’ve achieved product/market fit when at least 40% of surveyed users say they would be “very disappointed” without your product or service.
2. You have a demonstrable monetization model
Startups are always a gamble, and nothing cools an investor’s interest in a great idea faster than an ambiguous path to profitability.
You should be generating revenue, and if your burn and churn rates aren’t already low, you need to be able to present investors with a detailed plan to reduce them. You’ll also need to show them how you plan to spend their capital—what markets will you expand into? How will you expand sales? How will you retain and upsell existing clients?
3. You’re ready to scale—fast
If a seed round is really about establishing the viability of an startup idea, Series A is about demonstrating the viability of the startup itself. Taking the business to the next level means managing growth without sacrificing operational quality, and having the right resources and people in place to take advantage of every opportunity. If your infrastructure and team are already creaking under their own weight, your company isn’t ready to scale.
And when VCs say growth, they don’t mean it in the slow and steady wins the race sense. Jason Lemkin notes that VCs are looking for a path from ~$1M ARR to $10M ARR in five quarters or less. Lee Hower is a little more conservative: he says a Series A is all about convincing investors “that your startup has a good probability of being a $100M+ revenue company within 5ish years.” If you don’t have the operations or market size to make that happen, you may want to look into alternative funding solutions.
4. You have a clear customer acquisition strategy
Per channel, what does it cost you to acquire a paying customer? Will your CAC stay steady when your company loses its underdog appeal? For every $1 spent marketing to potential customers, what is the return for your gross margin? These are simple questions, yet a surprising number of early-stage startups aren’t prepared to answer them. Until you can, you probably aren’t ready for a Series A round.
Meeting these conditions doesn’t guarantee a successful Series A, but failing to meet them virtually guarantees that your fundraising will fail. Raising a Series A round is already one of the most stressful things you will attempt in your role as an entrepreneur, so why not take a little time to nail down these four essential aspects of the business first?
If you’re a SaaS business with at least $15K in MRR and gross margins of 50% or higher and you need to extend your runway to meet these milestones, Lighter Capital can help. Find out if revenue-based financing is right for your company.
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