Let’s start with the basics – the purpose of Series A and expectations from startups
Series A funding is intended for startups which have reached their Product Market Fit (PMF) and its purpose is to enable the startup to scale and increase its growth.
While during the Seed round investors evaluate three main risks : (1) is the founding team capable and can they build a broader and more suitable team; (2) is the market large enough to meet the need; and (3) can the team develop a product that meets that need
The main risk of series A financing is to evaluate whether or not the startup can scale and preserve its competitive advantage over time.
So what changed this past year
We should start with a disclaimer: there is a lot of uncertainty right now, both in terms of the global economic and political situation as well as the technology sector. Public markets have plunged, and tech companies today are trading at significantly lower multiples than in 2021 – and this affects all private company valuations.
The macro changes have slowed down all startup capital raising significantly across all stages, and the bar for a Series A has become that much harder.
In 2021, we witnessed companies raising Series A when there were hardly any revenues and at very high valuation multiples, even 100x. Another interesting observation was the speed at which investment rounds were done – 25% of the Series A’s closed less than a year after raising the seed round, and 10% of these closed in 8 months or less from the Seed.
European fund, Point Nine, surveyed companies that raised capital in the first half of 2022 and found that raising a Series A today requires $0.5-$2.5m ARR with 2-3x YoY growth. In other words, raising the A round requires a sustainable product, significant revenues, and a proven GTM strategy. In terms of round size and valuation, typical rounds are expected to range from $6-12m and valuations will be between $25-$50m. Obviously, there are exceptions and the full range is wider.
In the 2023 Series A world, your startup should meet the following expectations:
1️⃣ PMF (Product Market Fit) – you have already identified the target market and the end customer, and the product you are building resonates with the market, as evidenced by strong customer engagement, positive feedback, and repeat business. Now you need to ensure this PMF remains true.
2️⃣ Sales and growth – at this stage you should already have a small, yet significant customer base with repeatable sales, and scalable business model. Retention is key. Investors want to see that there is significant demand for the product or service. There should be clear indicators and milestones.
3️⃣ A strong team – if at the seed stage, the bet is on the founders’ ability to recruit a strong team, then post Series A all vital functions should be staffed and be competent and work together effectively. Investors look for a team with proven execution capabilities, one that is capable of overcoming challenges and achieving results. Advisors and consultants can also serve a key role in the startup’s path to success.
4️⃣ Competitive advantage – Your product should be differentiated from the competition, and you need a solid plan for maintaining its competitive edge over time.
Founders need to establish a coherent and well-planned strategy in order to raise a successful financing round. That includes a detailed and structured business plan which describes the company’s products and services, a competitive analysis, marketing and financial projections, and other important elements.
As always, it is essential to establish relationships with investors. So now is the time to attend industry events, connect with investors, and find more opportunities to present your company.
What does this mean for pre-Series A founders?
Below are some of Entrée Capital’s recommendations:
✅ Reduce expenses and extend the runway in order to reach your goals for Series A with the cash that you have.
✅ Deliver product and sales. Make sure you do it with the minimum team size and overhead possible.
✅ If additional funding is needed, you might consider doing a bridge or an extension. You could also consider taking Venture debt, which will enable you to extend the runway without additional dilution.
✅ Be sure to adjust your expectations regarding the round size and valuation and plan accordingly.
Building a startup is a long journey and raising capital is merely a means to an end. It is not always necessary to do big and ‘shiny’ funding rounds in order for a company to grow steadily and efficiently. We have even seen cases where overfunding was harmful.
As Avi Eyal, our managing partner likes to say “Each round of financing you do should be the last round of financing you ever do” – and when you internalize this, your chances of building a successful long-term outcome will dramatically rise.