From Seed to Series A: Planning an Effective Fundraising Strategy
Congratulations! Your business idea has gained traction, and you’ve garnered seed funding to test your idea in the marketplace. It’s a tremendous accomplishment, and it’s important to take a moment to celebrate.
Once that moment has passed, however, you’ll realize a lot of work still lies ahead. While you build your product and business, you’ll also need to simultaneously look ahead to your Series A funding—securing a partner (or partners) with the desire and ability to invest in your business’ future.
To secure Series A funding, you’ll need to think carefully about the needs your business is designed to meet, and why they are crucial at this juncture. As you find product market fit, don’t forget that you don’t need to go on this journey alone.
In this guide, we’ll explore the following steps we recommend to secure Series A funding:
- Create a timeline
- Pre-fundraising steps
- Active fundraising stage
- Finalizing the deal
- Using available resources
1. Creating a timeline
You may be flying high from a successful round of seed funding, but regardless of how strong you feel, a business based on seed funding alone has an expiration date. It’s crucial that you immediately begin the processing of calculating how long you can stay afloat, identifying resources for extending that time, and mapping your trajectory towards Series A within a reasonable timeframe.
Calculating your runway
As part of your documentation, you should have a clear idea of your general run rate—what it costs to keep your business operational. These costs include, but are not limited to, salaries, overhead (rent, utilities, et cetera), legal fees, software licenses, bank fees, taxes, contractor fees, marketing efforts, and supplies. Anything the company pays for, from office snacks to travel expenses, should be tabulated. Divide your total funds raised by this amount, and you’ll have a sense of your runway. Surprises always crop up, however, so it’s possible your money may not last as long as you intend.
Understanding Series A timelines
There’s no single path that every business follows between seed funding and Series A. Given the number of variables, it’s better to think about time ranges rather than fixed periods. For reference, it’s rare to move from seed to Series A in under 8 months. Most businesses should plan for 9-18 months for this process. That means there’s truly no time to waste in getting started.
Most plans set the time ranges as follows:
- Preparation: 6 - 12 months to devise a strategy and build investor contacts
- Investment materials: 1 - 2 months to create and edit your pitch deck
- Process: 2 weeks - 3 months to conduct tactical meetings with potential partners
- Closing: 2 weeks - 3 months to finalize a deal and complete financial and legal due diligence
Knowing your individual timeline
Understanding how much time your business will need for each of these phases is complicated. Some of the best resources you have are your early investors. Take the time to solicit feedback from your angels and seed investors on your runway calculations as well as estimates on the next phases of development. In addition, a helpful practice is to start creating the pitch deck for the next round right after closing the prior financing. This skeleton of a deck will highlight what needs to be true for the next round (including the milestones you plan to hit, what unit economics may look like, etc.). Doing this shortly after securing funding is best, as critiques will be fresh in everyone’s minds.
How should I build my relationships before securing Series A?
If you think a particular firm can add value to your company (the partner or firm has very relevant recent experience within your category), then it may be fine to build a relationship in advance of your fundraise. In these meetings, avoid calling out specific metrics but rather talk about the high-level vision for your company and enlist the investor to help with any issues you may be facing.
That said, it’s important to optimize your time. Relationship-building meetings with less relevant investors are a waste of your time. And worse, it gives the investor a data point on your business which could make your narrative weaker. Remember VCs are looking for trends, not just specific data points.
2. Pre-fundraising Steps
At the beginning of your process, you’re going to need to build a list of potential investors. Do this thoughtfully and with research. At that point, it can be helpful to look into personal connections you might have to your targets in the form of colleagues, friends, investors, or advisors. When I was a CEO, friends would often ask if I could introduce them to investors, but rarely would they actually have a firm or partner in mind. Just being introduced to any random investor won’t help your cause much and will likely waste everyone’s time. Do the research on firms that might be a fit and more specifically, which partner within that firm could be the right lead partner.
There are a few things about which you should be cautious. First, if a firm has made a similar, maybe even complementary, investment, don’t assume they will be interested in your company. Most firms want to diversify across sectors and business models, so having an adjacent investment may actually be a reason for them to pass. Second verify that you’re talking to firms that are actively investing and have available funds. Unfortunately, some investors will take meetings with founders even when their fund is not yet closed. Check Crunchbase to see when their last fund happened.
Start cultivating your network of peers. I am a big believer that CEO’s should actively build relationships with other CEO’s and dedicate some portion of their time to learning from their peers. The reason to start cultivating these relationships early is that your CEO friends are a great group to help prepare you for the fundraising process. Additionally, your CEO peers will be some of your best sources of introduction because they can speak intelligently about you and your company with the investors they know.
Develop your materials
Whether you use a deck to pitch (my personal preference) or a memo, have your materials ready. Some founders, rightfully so, are hesitant to share their materials before a meeting. In this case, I recommend you create a teaser deck (3-5 slides) that covers what you do and what you are raising. This allows you to avoid the awkward back-and-forth when an investor asks for a deck before they will schedule a meeting. In addition to your pitch materials, you should ready your data room which should include financials, cap table, and customer references. Your data room will also include a laundry list of legal documents but most will not be looked at until the post term sheet phase so focus your time on the items that lead to a term sheet.
Determine your style and how to tell your story in a way that feels genuine. Most Series A investors will make 1-2 investments a year. This means that while each meeting is important, you also know that you won’t get to a yes with everyone. Don’t try to change your style or story to appease a specific investor—what is most important is that you show up with energy and credibility. In your story, you should aim to address a few things:
- What you do and why it is important
- Why now is the right time for your company to exist
- Why now is the right time to raise capital, and
- Why you and your team are the people to bet on.
Depending on feedback you’ve received, you may also want to consider alternatives to traditional venture capital. While most pre-Series A companies may not be able to raise venture debt or traditional debt financing, you may want to consider new financing services like ClearBanc or Assembled Brands who make capital available to fund marketing spend or inventory purchase.
How many investors should be on my target list?
Most founders build a list of 40-50 targeted investors. Over time, if the fundraise is taking longer, they add names to the list. Regardless of the list size, I recommend segmenting your list into waves to make the process easier to manage and ensure that no firm slips through the cracks.
3. Active Fundraising Phase
Once your materials have been reviewed and deemed ready, and your pitch is well-practiced, you’re ready to start pitching. You may have multiple introductions into one firm—just remember that the strength of the relationship between the person introducing you and the VC matters a lot.
You should organize these intros to come in waves. Each wave should cover 8-12 different firms. The first wave could include parties you view as “practice meetings” but should also include some of your high-potential investors.
Try to schedule the meetings in each wave in as tight of a window as possible, ideally less than 10 days. By starting each conversation at roughly the same time, you have more control over the process and can ensure all investors are moving at the same pace (which will make it more likely to have a competitive process). Trying to reach out to every firm on your list at the same time increases the risk of things slipping through the cracks. I recommend creating 3-4 waves because each wave is easier to manage and you can quickly advance from wave 1 to wave 2 if you feel that momentum is slipping.
The vast majority of Series A’s don’t result in a pre-emptive offer. If someone shows up and gives you a term sheet, you should absolutely evaluate it. However, signaling that you’re open to a pre-emptive offer well before you begin your process is not always wise. I’ve seen many entrepreneurs get dragged into a fundraising process because they thought a pre-emptive term sheet was coming. When it did not appear, they weren’t prepared to run a full process but by then, the market knew they were raising. This is a bad outcome and ultimately takes more time while causing more stress for the founders.
Recognizing your power and responsibilities in investor relations
Founders should feel comfortable asking VCs questions during the fundraising process; it’s a two-way decision. I am often asked directly for feedback on the investment opportunity, how our firm makes decisions, where I think our firm can help the company. Later in the process, it is very common to ask for references as well as to conduct off-list reference calls.
If you choose to do reference calls on potential investors, you should select a range of founders to speak with. It’s important to hear from founders whose companies were successful and if possible, founders whose companies failed. Founders generally want to help other founders so I recommend asking the hard questions:
- What was this investor like when things took a turn for the worse?
- How responsive is this investor?
- What are they like in board meetings?
- Can you tell me about a time when they have gone above-and-beyond to help the company?
- Are there any times where their actions hurt the company?
Protect your time during fundraising
I recommend making the CEO the sole person in charge of Series A fundraising. Since the CEO will be the person responsible, it is important for her to dedicate the majority of her time to the fundraise. Later on, it becomes appropriate for a CFO and possibly other executives to be involved. In either case, I suggest that CEOs still conduct their weekly management team meetings and be present for any all-hands meetings. Stretch individual meetings with direct reports (weekly meetings can become bi-monthly, for example) and step away from other internal meetings where another executive can chair the meeting.
Internal communications during fundraising
One of the hardest parts of fundraising is that often your team or peers will ask about progress. For the vast majority of companies, VCs will not be falling over themselves to invest. Still, your team will expect an update and you might struggle to give one that is authentic and honest given how opaque the funding process really is. Here’s my list of best practices:
- Before starting your process, set expectations. This may be a long process and most weeks will have very little news.
- Be clear about what the company is hoping to raise and why.
- Be open about what your plans are if the fundraising doesn’t unfold the way you hope.
- Once you start the process, avoid sharing firm names and detailed status updates. Instead, share what you’re learning from the introductory meetings. For example, share that you were asked a very good question in one meeting which made you think about the product roadmap differently, or that you learned a bit of data that you thought might be relevant for the rest of the company.
- Once you are in the middle of due diligence, this is a good time to thank members of the team who are actively engaged in helping you create materials or collect data to send back to inquiring VCs.
- When you sign a term sheet, you may want to message this milestone (some founders prefer to wait until money is in the bank). In either case, you may want to signal that discussions have now narrowed down to 1 firm and you are getting closer to a finalized deal.
- After closing, consider making a short presentation in your all-hands meeting that helps employees, many of whom are stockholders, understand the implications of the funding round. They will be wondering not just about the economic effect, but also how this might change the hiring plan or how the company views near-term growth.
Often in a financing process, a VC may ask where you are in the process or what your expectations are relative to timing. I suggest being honest, but until you’re sure a term sheet is coming, do not admit to any hard expectations around timing. More often than not, VCs who feel pressured for time will simply pass, which subtracts from momentum rather than adding to it.
It will be important to signal to investors around certain key milestones—your first partnership presentation and a verbal term sheet. If you are hitting either of these milestones, this is a good time to signal to interested investors that your process has moved forward. Additionally, if the person who introduced you is close enough with the VC, they can also help by back-channeling on your behalf.
Leading up to a verbal offer, there are a few positive signals that investors are working up to a term sheet. A prospective VC reaching out to existing investors to discuss the company is a good sign, as is asking for your cap table. Again, nothing is done until it’s done but these signals may give you some insight into where you are in the process.
Once you receive a term sheet, you have little to lose by telling other investors who are in process with you that you need to make a decision quickly. However, this is not an ideal time to add new investors to your process as they will not be able to move fast enough and could take up bandwidth better spent on higher-probability investors.
Should I be taking meetings with associates?
Yes. Every firm’s internal process is unique and often opaque. An associate may be reaching out to you because a senior partner asked them to reach out. Or a partner may connect you with an associate to get the conversation started sooner given their calendar constraints. I recommend taking the first call and if the firm wants to chat further, ask if the partner who is the right fit can join the next meeting.
4. Finalizing The Deal
If you received a term sheet from a potential investor, don’t think your work is done. You’re just shifting in a new phase of research and decision making. If you received multiple term sheets, congratulations! But how are you going to decide which to accept? Remember that while the valuation may stand out to you as a statement of faith in your venture, it’s not the most important thing to consider when selecting a Series A funder. In exchange for their money, you’re giving over some of the control of your business. You’ll potentially have this investor represented on your board for the next decade.
Have conversations with potential Series A funders not just about financial terms, but how they intend to partner with the company and what their expectations are as a board member. Consider your working relationship and personal dynamic with them. If your skin crawls every time they near, you may not want to see them at the table every time there are difficult decisions to make. By the same token, going with someone who feels like a friend may not yield the best business outcomes. Walk this line carefully and work to find a balance in the professional-personal relationship you’re hoping to develop.
Most entrepreneurs are cautious and don’t consider the financing closed until the money is in the bank. Once the term sheet is signed, it’s important to stay close to the legal process until everything is closed. You don’t want your lawyer and the VC’s lawyer to have free reign on the legal process. Some legal points reflect business issues and should be dealt with directly with you and the VC. If one issue continues to go back and forth, get involved to understand the market standard. Negotiating around market terms is the easiest approach; both parties are incentivized to keep Series A terms as close to market as possible.
The actual closing process is something that will require much of your attention. Once you have picked a closing date, you will likely want to notify any existing investors (regardless of whether they are investing in this round or not) because they will need to sign the closing documents. You will need a few days to coordinate signatures from all parties including existing investors, new investors, co-founders, and existing board members (if applicable). Once the documents are signed, in a priced round, your lawyers will file a revised and amended charter with the state. Once that has been approved, all parties can wire their funds and close. On the day of funding, you should have one person actively monitor the company bank account to provide confirmation that the wires have been received.
Should you consider corporate venture capital?
Most VC’s do not encourage companies to take corporate venture capital in a Series A. I tend to think the costs (in time and potential risk of reducing future acquisition optionality) outweigh the benefits of taking corporate VC. That said, if there is a business partnership on the table that could meaningfully impact the business, it may be worth considering. In my view, corporate VC at a Series A should not be taken without fully considering the future implications.
5. Utilizing available resources
There’s a lot to take in as you consider your path from seed funding to Series A. It’s okay, even normal, to feel a little overwhelmed or anxious about certain aspects of the process. When you do, back up and think constructively about your process and resources to help you along your way.
At M13, we believe in helping founders as best as we can, which means dispensing advice and reviewing materials for as many as possible. Whether we are the best fit for your Series A or not, we believe in the businesses we support, and will make ourselves available to help your business grow as quickly and successfully as we can.
Just like my fellow partners at M13, I’m a former operator and founder who’s gone through this process myself. Submit your pitch deck and if we're in alignment you can make an appointment with me or my partners during office hours and we will work together to map out your individual path to success. For more information on the path between seed funding and Series A, read this wonderfully comprehensive guide from our colleagues at Y Combinator.