For many early-stage founders, getting to the Series A round is a milestone. It represents a new phase of growth for their startups, enabling them to power up their products and reach new market segments. To secure the right investor and deal, Jenny Lee, managing partner at GGV Capital, offers some expert tips.
It is easy to get all giddy when you hit the Series A stage, especially for first-time founders. It demonstrates that your product has a clear market fit, is gaining traction and your users love it.
But this is also where your journey becomes a steeper uphill climb. Now, you need to establish a clear timetable to achieve profitability, scale your operations, and solidify your product’s position in the market. For that, you need to get more capital—lots of it.
Here are nine bite-sized tips founders should follow when raising a Series A round.
Tip 1: Founder, product and investor fit
Series A cheques are usually between $10 to $15 million. This cash injection can go a long way in enabling your company to take off – and perhaps, in time, help your startup to achieve a pole position among your competitors. But before that exhilarating prospect gets to your head, proceed with caution! Getting stuck with the wrong deal or being ill-prepared for that next stage may harm your growth plans.
Cheque sizes are not everything. Although the higher amount may appear enticing, having an alignment between the founder, their product, and the prospective investor is more important.
Find an investor who has a thorough understanding of the sector and the needs and problems that your product is tackling.
Do your due diligence (DD) to ensure you can work with the investor from day one. That way, you can establish a healthy relationship where you feel empowered to ask questions and engage anytime.
Tip 2: Find an experienced investor
The tech industry has gone through many cycles, and today’s startup environment is more volatile and complex than ever. This is why having an experienced investor onboard is essential.
An experienced investor will be able to share deep insights regarding past trends and cycles, which will help you navigate difficult challenges and circumstances ahead.
Whether it be a period of hypergrowth or prolonged winter, these investors can extrapolate data points from past trends, form an objective analysis, and guide you towards sustainable growth.
Tip 3: Don’t blindly follow a template
While past data points are helpful, there is no perfect template for getting a startup business model right, especially in this volatile climate.
You need to have a deep understanding of your business model and the region and customer behaviour pain points. Determine whether your solution addresses those specific pain points before planning your next growth phase.
Tip 4: Figure out the endgame
What is the endpoint of your business? Break down the milestones. What components do you need to build to ensure your company has a smooth take-off?
You need to be able to articulate their grand vision and not only offer short-term goals or wins. When you pitch to a prospective investor, show them what your desired funding plan will deliver in the long run.
The right investor – who ideally will have sustainable long-term funds – can then conduct reserve planning and build a clear support plan to help founders go the distance.
Tip 5: Investors may not give much money (but that’s ok)
If your company operates in a nascent sector, investors might hesitate to take such a big gamble and only offer a relatively small sum (around $500,000 to $1 million). Worst still, there may not be a second cheque.
Don’t let the low funding amount dampen your spirit, though. In this scenario, the investor wants to see how your company will fare before taking the plunge into a bigger, mainstream deal.
Beyond cash, investors can value-add by bringing essential insights about the industry and introducing you to their networks.
Tip 6: What if an investor decides to pass?
Sometimes, investors will decline to fund your startup, even if your pitch or business model is sound. But don’t be discouraged! These investors might return for subsequent rounds after your startup has demonstrated greater success and traction.
The key is having initial conversations and meetings to plant the seed in the first investors’ minds.
Tip 7: Signing the term sheet doesn’t mean the deal is sealed
A signed term sheet does not mean that you have secured the deal. Diligent investors will, and should, continue to perform their due diligence up to the day before they hand over their cheques.
The entire negotiation process with a founder is the most revealing of the due diligence process because it shows us what the deal is all about. Investors will get into the nitty-gritty and negotiate reps and warranties.
Founders, you will have to deal with plenty of legal jargon at this stage, such as liquidation preference, redemption rights, and more.
It is a long-winded but necessary process because investment funds have a fiduciary duty to their limited partners and other funds. As they say, the devil is in the details, so investors have to be aware and protect themselves against the worst-case scenarios.
Tip 8: Prioritise the product over nitpicking numbers
While the due diligence phase is important, you shouldn’t get too bogged down on the numbers or the terms, such as valuations, ESOP and exit liquidation.
Yes, negotiating for favourable terms is important, but ultimately, during a Series A round, your primary focus is on bringing the product to a broader market and securing customers. Don’t get stuck in the weeds.
Tip 9: Don’t break the bank on legal
Don’t spend too much money finding the best lawyers. There is only a fixed set of terms that founders have to worry about. A good lawyer will inform founders of the commercial terms and point out onerous clauses. Spend around or less than $50,000; don’t overpay. Just get the service you need.
Read More: The value VCs can bring to a startup’s board
