Many startups, even those run by experienced entrepreneurs, often think their company is in great shape for Series A. Too often this isn’t true. Yet, what VCs expect from a B2B SaaS startup to invest in a Series A round is in fact very consistent. Now that the Slush week is here again, we thought it would be a good time to de-mystify these expectations. In short, there are eight different requirements to meet.
As angel-like investors, we usually enter a startup’s lifecycle at the pre-seed or seed stage. The product has been birthed into existence with the first satisfied customers actively benefiting from it, the company is generating more than EUR 10,000 in monthly recurring revenue (MRR), and they are working to level up their sales.
Evolving from there to the Series A stage is a journey, and often slower and more laborious one than anyone would like. As is known. What we have found while working as advisors to startups is that many of them, even those run by experienced entrepreneurs, often get themselves into thinking their company is ready and in great shape for a Series A round even when in fact it is not.
Meanwhile, what VCs expect from a B2B SaaS startup they will invest in for series A is very consistent. There isn’t anything cryptic about it – they have a set of requirements and they can be learned. A lot of it is data-driven, as the VCs themselves are.
As the Slush week is here once again, we thought this would be a good time for us to do our part in de-mystifying these expectations.
Is your company ready for series A?
It is if it meets the following conditions:
1) MARKET: Your market must be large enough. In other words, it needs to be a market over EUR 1 billion to justify potential to grow into a business that is larger than MEUR 100. There are no exceptions here.
2) CUSTOMERS: You must be able to show sufficient customer traction. This can be broken down to a few details the VCs tend to expect:
- Your monthly recurring revenue (MRR) needs to be approaching or already over EUR 100,000
- Your monthly average growth rate must preferably be 10%, ideally more
- Your customer retention needs to show evidence of product/market fit and thus your annual churn rate must be less than 20% of your customers, ideally much less
- You must have evidence of customer expansion success, and ideally, your net churn is negative when measured in EUR – in other words, you are upselling more to your existing customer base than you are losing in downgrades and churn
- You must have evidence of international customer traction for your product (especially if your company is from a small home market)
3) SALES: Your sales model needs to generate measurable and fairly predictable results and your sales operations need to be ready to scale. In more detail:
- You need to demonstrate that you understand your customer’s behavior
- Your market segments and sales model need to be clearly defined, i.e. whether your future scaling is based on enterprise sales, inside sales, online sales, or channel sales
- Your customer lifetime value (CLTV) must be at least 3–4 times the customer acquisition cost (CAC) and your CAC also should be smaller than your annual average revenue per account/user (ARPA)
- You need to show at least some evidence of experiments where you have multiplied your sales resources successfully
- Ideally, you should have at least some viral coefficient – customers who bring in new customers – that lowers the CAC significantly
4) COMPETITION: You need to be able to prove you understand your competition, your positioning and differentiation among competitors and show that you have a sustainable competitive advantage.
5) PRODUCT: It must be technically in a condition where it gets past technical due diligence. Also, obviously, it needs to be scalable.
6) STRATEGY: You need to present a clear long-term vision for your company, as well as a concrete 18-to-36-month plan on what to invest in next and how the investment money will be used. In particular, the VCs expect to see:
- A roadmap for technology development
- Concrete plans to invest in the marketing and sales model(s) that evidence shows bring good results and a favourable CAC/CLTV ratio
7) PEOPLE: Your team needs to have the credibility and core skills to execute the aforementioned plans.
- Your key directors should be well-incentivized, and they must be high-performers in their respective areas
- You need to have a clear plan on how your team will be complemented and scaled as you grow
- Your board of directors and your advisors must significantly add value and have experience about the issues your company is likely to face within the next 6 to 24 months (on the other hand, this is something that the VCs are able to fix)
8) DUE DILIGENCE READINESS:
- Your legal and financial housekeeping must be high quality
- Your cap table must be sensible for new A-round investors leaving enough skin in the game for the key people after the investment round while avoiding “dead weight” owners who are not contributing to the business financially or in some other form
Do you HAVE to meet all of the above criteria? No, not necessarily all of it. Most of the requirements related to data and figures, however, are deal-breakers. As for the rest, if your company clearly falls short in one or more areas, you must at least have a solid and detailed plan on how these issues will be addressed and fixed.