Raising Seed and Series A Rounds

My previous post laid out a simple structure for a pitch deck. Ten slides only. Easy enough right? Not really. The thinking, analysis, and work that goes on behind the scenes before you can articulate your business in a simple yet comprehensive way is far from easy. In addition, it progresses and changes as you go through your lifecycle as a startup, and as you go through the funding process.

Let’s say you read the previous post on raising an Angel round, successfully raised $250K, and used the funds to test your startup’s key hypothesis, build your product, and acquired some customers through your customer development efforts. Now, your money is running out and it is time for the next round of funding: the Seed round. This is the round that should help you really validate your business model in more detail, and help you get to scale.

VC bloggers like Mark Suster have said that Amazon Web Services has changed the VC industry by creating the trend of micro VC and Seed investment. As a result, there are 3 groups you can go to for raising your Seed round:

  • Angel networks or angel groups who can syndicate to jointly fund your Seed round
  • Seed funds, i.e. funds that only do early stage Seed investing
  • VC’s that have Seed programs or are known to do smaller, early investments

All these three types of investors tend to say the same thing to startups looking to raise a Seed round: “Show me traction!” They expect you to have used your angel money to refine your product and get some initial market validation for your product. They also like to see that you have smartly invested in customer acquisition so you can demonstrate solid traction. The figure below visually shows which parts of your pitch should be fully completed.

On the business model metrics, the figure shows a half-full circle. In other words, it is expected that you have clarity on a number of the key metrics and have improved those to date. At this stage, the focus tends to be on those metrics that impact revenue. Dave McClure from 500Startups suggests focusing these metrics around “AARRRR”:

  • Acquisition: users come to site from various channels
  • Activation: users enjoy 1st visit: “happy” experience
  • Retention: users come back, visit site multiple times
  • Referral: users like product enough to refer others
  • Revenue: users conduct some monetization behavior

For the Seed round, this tends to be sufficient. When you move to the next stage however, revenue alone is not enough. Venture Capital firms want to see a real business. A profitable one. One that can generate returns for them and their investors. That requires metrics and hard numbers that go beyond pure revenue growth. Things to consider in your business model metrics here include fixed costs, variable costs, unit economics and contribution margins, return on invested capital, etc. Some of these metrics will be generic, but many are industry specific. For example, for an e-commerce business, you have to know how much capital is locked up in inventory, your inventory turnover ratio, and the impact this has on profitability and cash flow. In summary, you have to be able to communicate your entire business and be able to convincingly explain how the balance sheet, P&L, and cash flow will change over time towards break even and profitability.

In conclusion, pitching for funding isn’t easy. Your business keeps evolving, your understanding of your business keeps involving, and as a result, your pitch continues to change. The key is to ensure that there is validated learning, clear progress and traction, and a clear view on how to reach profitable and sustainable growth. Easy enough right!?