Over the past few months I’ve been asked for my advice on how to raise a Series A, both on a one-to-one basis directly with founders or a one-to-many basis in the form of panel discussions. Each session had challenged me to think through the lessons and experiences we had raising Sensat’s Series A, to the point where I now have an inner-consensus as to what I think can make the difference in a raise. Partly for efficiency of time but mainly because I’m passionate to add value to others where I can, I wanted to write these tips downs and share some practical documents/frameworks that helped us ultimately run a successful process – warts and all.
Before we jump in though, two disclaimers:
- Firstly, as a venture-backed tech startup, this advice is mainly targeted at peer tech startups. If your business is not quite the same place take my tips with due consideration.
- Secondly, I’ve only raised Series A once and am by no means an expert. Time and the market changes, so please heed this advice regarding your experience in speaking with investors and watch for the sell-by date on this information.
At Sensat, we raised our Series A from our number 1 target investor in 2019, a total of ~$10m. As a B2B enterprise play that is effectively building the third level of the internet. At the time of going to raise we were a team of around 20 people, had about 25 enterprise customers and were failing quite miserably in building out our product vision and getting it to market! We still had about half of our seed funding ($4.5m) in the bank and were primarily looking to raise capital because our client growth was outpacing our ability to deliver against it (granted a good problem to have but one that creates a number of risks for the business).
What I learned from Seed
From an external perspective we raised a fairly successful seed round (https://techcrunch.com/2018/08/10/sensat/)–one of Europe’s largest in 2018. However, internally the process was long, distracting and could have been done way better. I effectively ran it as a waterfall process, I would meet an investor, pitch them, answer questions, meet a new investor, pitch them, answer questions and so on. This was really ineffective on multiple fronts:
- It was a huge time drain and distraction from the crucial early stages of building the business.
- It meant the process was never running toward a conclusion. There is little incentive for investors to commit to an investment when they can instead observe the growth and de-risk their potential investment over time unless there is a mechanism forcing the process to a conclusion. In reality, you need a degree of competitive tension, more for the sake of it acting as ‘the arrow of time’ than terms or pricing.
- Feedback was limited so learning how to iterate our pitch in parallel was difficult, meaning I was much slower to fail or learn that I could have been.
Sensat’s seed process actually took a little over a year, often on a rolling close basis–a long time! Never again. So here’s the big differences and tips for raising Series A…
Have a partner to work with
While I was mainly responsible for our Seed raise, with Series A I needed to share the workload. Step in the fantastic Lewis Crosbie, a friend from when we worked together at Barclays who I had convinced to join us a few months earlier. Lewis wasn’t our co-founder (nor does your investment ‘partner’ need to be) but he was somebody I trusted and found a close working groove with. Lewis also complimented me where I was weak (mainly thinking from an investors perspective and being organised).
During the entire raise process Lewis and I worked back to back, shared dingy San Francisco motel rooms, travelled thousands of miles across three continents, spent countless late nights strategising and enjoyed some of the funniest moments of my career. Lewis wasn’t just a colleague I just got along with, he was a friend that challenged me, empowered me and encouraged me. Raising a Series A will be a long and sustained effort and Lewis was a key part of both the success but also making sure we enjoyed it. Looking back, there is no way I could have done this alone, so I would strongly encourage finding somebody that can be fully dedicated to making it a success.
In a partner you need somebody that:
- You trust
- Really enjoy working with (and spending way too much time with)
- Can play off of your strengths
- Can pitch on your behalf (doubles your capacity)
- Is highly organised and can act as the go-between
- As keen to throw themselves in the deep end and learn fast alongside you
- Great relationship builder
If you don’t think you have this person in your team, or you can’t spare that person from their day job, then hire somebody that has ambitions to launch their own start-up one day and will benefit from a 6 months on the coal face learning fast stint (FYI Lewis now runs the super successful Komi and has gone on to raise a few million).
Run the process like it was a sales opportunity
My waterfall approach to Seed was ultimately painful. For Series A we ran a much tighter process which is very similar to a sales process. Prospects (potential investors) move through a multi-stage funnel (stages are based on qualification criteria) at the same time, meaning at all times everyone is about the same stage. As mentioned before, this has a number of benefits, primarily:
- There is competitive tension to drive the process towards a conclusion. Not every investor you meet is going to make you an offer (term sheet) but if you can finish your process with several term sheets you can drive the process towards a close
- You are continually learning from every meeting and iterating on your pitch. If you take 5 introductory meetings and incorporate what you’ve learnt into the next 5, then of course these will be much better
- Timelines are susceptible to slipping, a process helps keep them on track. At the end of some fundraising journeys is a dreaded cash out date, so time slippage could be terminal
- It keeps you more organised as you know roughly where everybody is. It’s good to reduce the cognitive burden as much as possible to focus on the things that really matter
Decide upfront what the stages are in your process, and what the qualifying criteria for each stage are. For example, your first meeting might be an introductory meeting with an analyst, you should not move that prospect to the next stage in your funnel until you have met a partner. In those early meetings you should also qualify with the prospect what their process is internally, so you have a mutual understanding.
Think about what your ideal investor looks like, and qualify everybody you meet
This has been described as ‘one of the most methodological methods of fundraising’ but it was incredibly valuable for us. Firstly, think about what type of investor you want–what is your ideal investor profile? I had read somewhere that a VC/Founder relationship lasts longer than the average marriage, so getting the right fit is incredibly important.
Actually I couldn’t stress this enough, but my backup point is slightly different. Somewhere in the region of 90% of VCs underperform market benchmark returns across their funds portfolio. In other words, 9 in 10 VCs are actually really bad at their jobs–and you don’t want to let people who are bad at their jobs anywhere near your precious startup. You need to test and validate who is good for you as much as they will test and validate if you are a good investment opportunity. To do this, we need to ask ourselves ‘what could accelerate the progress of the company right now?’. For us at this stage, the answer revolved very much around three things:
- Ability to help us attract and hire exceptional talent
- Ability to fund the company long term
- Ability to build our reputation from an unknown startup to a credible and exciting business offering
In response, we created a ‘qualification matrix’ that listed 10 aspects of an investor and how we felt against each criteria. Each question would be weighted equally (though that can be changed) and the worst answer would receive 0 points, and the ideal answer 5 points. As part of our introductory meetings Lewis and I would pre-research the funds to uncover as much of the answers to our questions as possible, and where we couldn’t publicly find answers we made sure to ask in our meetings. After the meetings we would both independently score them (as we didn’t always agree or take the same impression) and then average the scores to get a final tally.
Ability to fund the company
Fund size can be an indicator of fund quality, but more realistically we wanted investors that could support us over a longer horizon.
|Question||What is the fund length and structure?|
|Worst answer||<3Y fund lifecycle|
|Not great answer||<4Y fund lifecycle|
|Okay answer||<5Y fund lifecycle|
|Good answer||Non-typical VC|
|Ideal answer||Evergreen fund|
|Rational||Funds typically work on a 5 year deployment horizon, followed by 5 years where they harvest the returns. If a fund was 3 years into that initial deployment then they would likely begin to try to exit the business within 2-3 years. This pressure to exit wouldn’t be beneficial to Sensat as our time horizon was longer to build at scale. Ideally we were seeking an evergreen fund (an investor that has no pressure to exit their investments).|
Question: What is the fund size / access to capital?
Not great answer:<$50m
Rational: This is a generalisation and there will be edge cases, but going back to the point that 9 out of 10 VCs underperform the market then it makes sense to ‘follow the money’. What we mean by this is that those funds with more capital generally do so because they have a trusted track record of better returns and investments, whereas funds that have raised smaller amounts tend to be newer/less experienced. We also wanted an investor that could go the journey with the company as it grew, not cap out after our Series A. A fund that can’t definitely give you a number of their size is a big red flag.
Experience in building deep IP
This mattered to us because we are a tech-first company, and we needed investors that understood what that meant and could challenge us on our operating, business and scale plans.
Question: Fund partners have operating experience in tech
Not great answer:Some experience
Okay answer:Yes with some track record
Good answer: Yes with medium track record
Ideal answer: Yes with strong track recordRationalYou can be a great investor without an operating background, but you’re not looking for a great investor, you’re looking for an operational support partner. Generally speaking our experience is that ex-operators are an order of magnitude better to work with as they have empathy to the situation that can only be derived from being in it. We really felt this was important as we entered the next stage of growth.
Question:Fund has a B2B tech focussed portfolio
Worst answer:More than 10%
Not great answer:More than 20%
Okay answer: More than 50%
Good answer: More than 60%
Ideal answer: More than 80%
Rational: Scaling an enterprise business is a very different experience to scaling a consumer business. We wanted investors that understood that, could help us navigate that (and had the patience to see that come to fruition).
Question: Fund can challenge us about our technical build
Not great answer:Passive
Okay answer: Encouraging
Good answer:Encouraging with introductions
Ideal answer:Hands on help
Rational: Twenty something year old founders should be under no illusion they have the perfect technical operating model figured out. Indeed we wanted to draw upon the experience of or operating investors and their funds to help us validate and challenge the technical decisions we were making. This is not intended as an approval process nor would it have the power to block decisions, instead it is done in the spirit of always pushing ourselves to be the best.
Strong reputation and credibility
You will be judged by your investors, by the market, by other investors, by your customers and definitely by potential hires.
Question: What is the fund’s brand/reputation?
Worst answer: No external brand
Not great answer: Locally recognised brand
Okay answer: Locally recognised brand and signal investor
Good answer: Globally recognised brand
Ideal answer: Globally recognised brand and signal investorRationalThe brand or reputation of the investor will inevitably have a consequence on how your startup is perceived by the market, and this shouldn’t be overlooked. For example a strong, globally recognised signal investor will make it easier to fundraise next time around (it opens doors).
Question:What is their ability to attract top talent?
Worst answer: No brand to help
Not great answer: One degree introduction
Okay answer: Brand will help passively attract top talent
Good answer: Actively help attract top talent
Ideal answer: Actively help attract and recruit top talent and has its own network (mentors or people)
Rational: When you’ve closed your Series A, one of the first things you will want to do is hire talent. This is a risky phase of your growth, you may be asking leaders and executives to join your startup before it has operationally proven itself. A strong signal investor can pay dividends here, it is a way for potential employees to validate the quality of the team and the idea.
Question: Does the fund have access to a strong mentor network?
Worst answer: No mentor network
Not great answer: No mentor network but well connected to Tier 2s
Okay answer: No mentor network but well connected to Tier 1s
Good answer: Can provide Tier 1 mentors in certain disciplines
Ideal answer: Can provide Tier 1 mentors across all teamsRationalLeaning again into the value add element of your investors (beyond cash), we recognised that access to great mentors was potentially a game changing prospect that could be unlocked. Additionally we wanted this for the entire team, not just the Founders/CEO.
Other questions for consideration:
- What is their ability to attract top talent?
- Does the fund have access to a strong mentor network?
Understanding of long term goals
Sensat is a vision first company (not to be confused with the fact every startup has a vision). This takes understanding and a whole lot more patience from our investors, so we needed to make sure our investors are on the same wavelength.
Question: The fund thesis matches Sensat’s vision
Worst answer: No fit
Not great answer: Fit if you squint
Okay answer: Matches through related industries
Good answer: Strong match with relatable investments
Ideal answer: Completely matches Sensat’s vision
Question: The fund has shown interest in supporting our vision
Worst answer: No interest
Not great answer: Passive interest
Okay answer: Supportive
Good answer: Actively supportive
Ideal answer: Completely bought into vision
Rational: If you really cared for something, had a passion for seeing it come true, then you would go above and beyond to help that thing be as successful as it possibly could be. This is a good way to test who cares about your vision vs who is just in it for a financial return. The best performing funds here will have gone out of their way to help or see how they can help because you share a desire to make that thing come true.
Question: The fund understands our strategy and business model
Worst answer: No understanding
Not great answer: Confused/mis-understood
Okay answer: Base level understanding
Good answer: Understood
Ideal answer: Understanding and actively support
Rational: It’s amazing to me how many investors subscribe to the church of SaaS, where anything other than a vanilla SaaS business model will be misunderstood/misquoted or downright rejected. This is incredibly poor investing as real world go to market, as any operator will tell you, requires nimble and flexible adapting business models. You’ve likely figured out what you’re doing and the way you’re doing it because you’ve spent hundreds of hours with your customers and have worked with them to develop a solution. That is by no means above suggestion and critique, but it shouldn’t be trodden on by an investor with no operating experience in your market who has known your company for a total sum of two hours. If advice comes too early, heed it as a strong warning sign.
A helping hand here is really useful, think of it as the snowball effect–anything to get that ball rolling
Question: Can the fund provide us access to different markets?
Worst answer: No access benefits
Not great answer: Introductory access benefits
Okay answer: Provides access to general markets
Good answer: Provides complimentary access to target markets
Ideal answer: Provides strong access to target markets
Rational: Credibility and brand name are two things often missing from early stage startups, so any help here from investors can be incredibly useful.
People fit – do we like them?
It’s important to work with people you like, and it’s impossible to like everyone, so choose the ones you do!
Question: Do we like them?
Worst answer: No
Not great answer: Some concerns
Okay answer: Okay
Good answer: Good fit with Sensat personas / culture
Ideal answer: Really strong working relationshipRationalLet’s be real, you’re not all things to all people nor should you be. You should strive to build strong working relationships with your investors. This is a crucial point.
Reputation of pricing
Setting terms on Series A has a strong knock on effect. What you agree here will either compound in subsequent rounds or set you up for a strong negotiating position (and maybe the ability to scale back some terms).
Question: What is the reputation of terms offered by the fund?
Worst answer: Bad – double dip participating preferenceNot great answerAggressive market
Okay answer: Market
Good answer: Friendly market
Ideal answer: Founder friendly working terms
Rational: It is a good idea to speak to founders in the portfolios of VCs you are speaking to. This will help uncover their experience of working with the investor but also equip you on where certain terms settled. Generally we preferred to reach out to founders directly, and generally they were very open. Indeed some of this information was incredibly useful in final negotiations later down the line. Founder friendly terms were our ideal, essentially you have strong trust from your investors and they want to see you succeed in a win-win situation. Some funds are known for very aggressive, often ‘back door’ type terms that can screw first time or naive founders without realising it. Don’t work with these investors.
The qualification matrix gave us two powerful weapons amongst our process:
- Firstly, we were able to rank during the early stages of our process all the prospects. Remember the aim is to find the match with the best possible investors for you, not to just get funded. To this extent the qualification matrix allowed us to see who was top, middle and bottom tier. Bottom tier investors were pitch practice, we would set up morning meetings, inevitably make mistakes and refine/build our confidence with these funds. We would often try to set up our top tier fund prospects for the afternoon or end of day, where you have the wind in your sails from a full day of top meetings. Bottom tier funds you can also play to try to wrangle an early term sheet from, helping to spur the process towards a conclusion. This is called a lead term sheet, and the more of them you can get, the better your eventual outcome will likely be.
- When dealing with mid and top tier prospects, the job of going back and re-qualifying made us stand out as more switched on and engaged than most startups they see. For example, in our opinion Bessemer, a well known US VC, had scored fairly low on fund lifecycle (they were mid-deployment) so we wanted reassurance they weren’t looking to exit us as soon as possible. We were also unsure how they could practically assist us with attracting talent (especially given they have less of a household name in the European tech scene) and we were unsure how our vision fit with their thesis around data decentralisation. Being able to engage on real and meaningful points like these reflects well both ways
If I were to do this again for Series A, the only optimisation I would make is to also validate the individual partner you will work with more, as ultimately they are your point of contact and champion, not the fund logo.
Due Diligence made easy
The single most powerful document we produced for our Series A was a bitesize FAQ/Due Diligence doc. I remember writing it in Squaw Valley, Tahoe, whilst about 3m of snow was dumped outside and I didn’t dare join some of the team on the whiteout slopes.
The due diligence document was a collection of the frequently asked questions we had received during the build up to our process and the process itself. The document itself provided short, bullet point succinct answers to these questions and covered everything for the team, the vision, the IP and the commercials. If meetings had gone well and progressed through the funnel then this would be something we could send on. To us a document like this seemed obvious, but it was stunning how many VCs commented that they wished every founder did this. I would say that the questions should be 85% replicable to your company, with 15% of specifics added in. If it is useful, and you’d like access to a version of this document then get in touch.
This document served several benefits:
- It massively reduced the time to progress process between meetings and completely cut out the back and forth answering queries
- This meant we didn’t have to respond to ad-hoc requests, which would keep you up until 2am and freed up our time to meet more investors/founders/influencers
- IC memos could copy paste these bullet point answers, reducing misinterpretation or chinese whispers and communicating the proposition in your words
- Served as a negotiating chip to progress prospects through the funnel (i.e further qualification might be needed)
- Was a chance to show our competence and give insight into the wider quality of our operation
- Allowed us to gather our thoughts and structure ahead of time. Very few amendments or updates went into this after the first version was finished
- It acts as a great tool to communicate to your team and makes sure everybody is singing from the same hymn sheet (meaning you can increase the bandwidth of your team to convey the message on your behalf)
- Once fundraising is complete and you hire, it serves as the company bible during onboarding (but must then be regularly updated!)
This single document was the far the most valuable thing I did to advance the cause of our Series A, and the feedback from investors throughout the process was unilaterally positive. I would recommend you produce something similar.
I am always open to a conversation on raising funds, so if you want to know more or simply engage founder to founder, drop me a message at email@example.com.