What Does it Take to Raise a Series A in San Francisco Right Now?

Posted February 1, 2019 by Jacob Mullins

Originally published on Medium

Every day I talk with entrepreneurs raising a Series A. And as an entrepreneur, myself who has raised venture capital, I want to do my best in helping others understand how to be most successful in their raise, whether that’s with us at Shasta or with any other investor. This is a conversation I have daily, so I thought I would share in a broader form.

As venture investors we are on both sides of the fundraising coin, coaching and guiding our existing portfolio companies towards successfully raising their next round, while aggressively evaluating and pursuing new investment opportunities. With both sides of the coin we have a pretty targeted understanding of where the market is at any given time.

Now my advice below is objective, this isn’t a data driven analysis, I wanted to share my perspective of being inside the Partner Meeting room every Monday morning, and distill down the core components that VCs are talking about when making decisions.

But first! Let’s remember that today’s environment is driven by what happened over the past year.

In 2018, we saw

  • Big money: Strong activity from Softbank Vision’s $100B Fund and the resulting growth of other megafunds like Sequoia’s $8B fund
  • Higher valuations: With bigger funds comes the need to deploy more capital in larger chunks, resulting in higher valuations to make sure the cap table and dollars-in are aligned for future growth ahead
  • More customers: Software ate (past tense) the world, all companies are moving to software solutions or cloud platforms.
  • More revenue: More customers = more revenue in the system, so the bar gets higher on every company
  • More companies: We continue to see a robust angel, pre-seed, and seed ecosystem which is birthing companies at incredibly high rates. This means more competition for revenue, customers and venture dollars.

Today in 2019 — What you need to raise a Series A

  • *PMF PMF PMF* — Make this your mantra. Product Market Fit. You want very clear validation from the market that your product is hitting a rich, deep vein. Product Market Fit differs for all companies so look for comparables of companies that have similar business and go-to-market models in order to gauge your baseline. If you are a consumer media or gaming company, you need super strong DAUs and MAUs, with strong user retention cohort data (e.g. Instagram). If you are a subscription company, consumer or B2B, you want super high retention cohorts, over a long period of time, and very low churn. (My Partner Nikhil Basu Trivedi has written two great posts on consumer subscription models, one on Dollar Shave Club and another on learnings from Blue Apron). If you are “land and expand” SaaS you want relatively short sales cycles to get your first seat and then you want to see relatively viral expansion of new users within the organization (Slack) (Here Brad Feld spotlights the myths, fallacies and truths of knowing if you really have PMF.). If you are an enterprise sales model you want to see post-POC sales in the low to mid six-figures, high six figures is awesome, seven-figures is excellent, but make sure these are repeatable and don’t take multiple years to close, with more than just 1 or 2 customers, and a robust market ahead to sell into. (If anyone has a great enterprise sales guideline blog post, would love to know about it and update this with a link on Medium).
  • Revenue: While PMF can be an amorphous definition, the great equalizer is CA$H. Revenue. Money. USD. Euros. This is the common language that all investors understand. If you can get into the revenue this is your best bet of clearly demonstrating product market fit. Right now, most of the venture market is entirely in love with the idea of “Recurring Revenue,” thanks to SaaS. Where is the bar today for Series A? At least $1M in ARR (annual recurring revenue) minimum, $2m — $3M + even better, if you’ve gotten to that level in 12 to 18 months and have a 2x — 3x year over year growth rate, this will excite investors. Now, those of you that aren’t doing a SaaS business may wonder about your own metrics and how they relate to the ARR world. My answer is that each company has its own unique answer for Product Market Fit. But today, most venture investors are very familiar with “recurring revenue,” so I would counsel you to talk about your revenue growth rate whether it’s conversions, GMV, transaction rate, up-sell rate, or whatever it is as a version of “Annual Recurring Revenue” which is predictable and connotes that significant revenue will not be lost during the next year. This will make it easier for you, at least today.
  • Growth: Revenue is only half of the story. In fact, growth + revenue is the whole story. Flat growth year over year (YOY) is not interesting. 2x growth YOY is good. 3x+ growth YOY is HOT. Every Silicon Valley investor is obsessed with the “T2D3” growth plan derived from SaaS business models. (I don’t know if he coined the term, but here is T2D3 as written about in TechCrunch by Neeraj Agarwal at Battery Ventures in 2015.) What is this? This is your revenue growth glide path for the next five years to get you to $100M in revenues. Starting at $1M in ARR, it means that your revenue growth triples in year 1 (to $3M), triples in year 2 (to $9M — $10M roughly), and double for the next three consecutive years from $10M to $20M, $20M to $40M, $40M to $80M. This is the rough plan to go from $1M in ARR to $100M in ARR in 5ish years. (Now while this is a common framework for early stage investors this may not even be enough anymore to be a breakout IPO, as written by my Partner Doug Pepper.)
  • Instrumented Go-To-Market: If the prior paragraphs are happening you probably have a good sense of this already. But the general point is to know where the levers are in your business in order to increase revenue, engagement, retention or upsell growth, or decrease churn. This means you will want to have tested different user acquisition channels and tactics, including paid channels. Especially paid, likely you will use a large proportion of your Series A capital in order to grow revenue, your investor will want to know that you know how and where to use the capital and that it won’t just be frittered away on tests. Come in with data and a strong story that inspires confidence on the instrumentation of your business.
  • Bigass Market: Make sure you are conveying a compelling market opportunity size. What is compelling, I’d say $10B market growing to $100B over the next five years. With so much of our world shifting to digital and cloud based solutions it shouldn’t be too difficult to align yourself to a large industry shift. While big markets are exciting, you will also want to convey that you have an operating and growth plan that grows into this market based on company stage and dollars raised. You can’t boil the ocean, so scoop it into a kettle in pot sized increments to get to that long-term rolling boil. It may be helpful to convey your market size in different tiers, based on geography, industry sector, or customer type. The storyline you will want to tell is that with your Seed round you proved out PMF to Market Segment A (baseline). With your Series A you will prove out PMF to Market Segment B (bigger), with your Series B you will prove out PMF to Market Segment C (even bigger), and so on. By tiering your approach into the big market, you can convey your instrumented approach to attain PMF in different segments, and inspire confidence in your ability to grow going forward.
  • Team: The definition of “last but definitely not least.” Who you are is really what matters. And, again, if you are seeing great revenue and growth you are already doing something right. Investors want to feel comfortable trusting you with millions of dollars. We want to know why you are the best person / best team on the planet that can solve this problem. We want you to be confident and authentic, promotional, but not overly promotional. We want to believe your backgrounds have led you to this perfect moment, when you got this insight and started this company — an aligning of the stars, so to speak. Put your team slide very early in the deck, like Slide 1 or 2. Setting the foundation for why we should believe you is key to us buying into the rest of the pitch. I know for me, beyond the analysis, investing is also an emotional decision — I plan to work with the founders I invest in for a decade to come, so it’s important for both sides to have a strong emotional connection.
  • Great story: Spend the time, spend the money on building out a great storyline and a beautiful presentation deck that respects the amount of time that you have put into the business, and equally relays your company information, as inspires the listener. Make sure that the way you relay your information to investors is clear, concise and exciting. Sometimes it’s hard to see the forest through the trees so it’s helpful to bring in outside help. It’s often not cheap, but worth it. I have worked with Elena Madsen at Hat Trick Communications in San Francisco (not a sales pitch, just a resource!) on a couple of company deck/storylines and she has been transformative in helping effectively relay our opportunities.

If you have these components, there will be no lack of funding options. In capital rich environments, like right now, the name of the game is fast market expansion, which means it’s a capital competition game. In up-cycles, this is OK, but be mindful to keep a strong understanding of your business fundamentals and unit economics, so that in a down-cycle you can optimize the business for longevity as opposed to growth. In environments like today, we often encourage our companies to take in extra capital if they have that option, and be a little less worried about dilution. For when cycles turn, and they do turn, you will have the capital, and instrumentation of the business to be able to weather the storms.

Now for those of you who don’t have these metrics, all is not lost! Second, even third Seed rounds, are common. But, having the fundamentals of your business nailed down similar to what I describe above is still very relevant, just on a smaller scale.

Good luck!