The landscape for early-stage investing looks entirely different today than what it was a decade ago.
The times have changed & Series A investors are looking for more and more traction before leading large Series A rounds. Institutional seed investors have followed suit — increasingly investing only in companies with demonstrable success in the market and because institutional seed investors are funding slightly more mature companies, a new category known as ‘pre-seed’ has emerged to fund the companies one step earlier.
What milestones do startups need to reach to raise an institutional seed and later a Series A?
There is still ambiguity on the issue but still we have come up with ballpark measures that can act as indicators of the industry scenario.
A few pointers about milestones for Fundraising
Before we dive into the milestones themselves, let me clarify a few things:
1) Different types of companies require various different milestones for funding.
The types of businesses we will cover in this post are:
- · Consumer transactional (ecommerce, consumer services, marketplaces, etc.)
- · Consumer audience (social media, free applications, etc.)
- · SaaS (organizations that use software to provide customers with a service.)
- · Deep Tech (technology with real technical IP that will take time to develop and commercialize)
2) Investors don’t just look at top-line parameters.
Put straight forward, for seed and Series A deals, investors will also need to see a high-potential team with founder/market fit, an attractive market opportunity, and a business model that forecasts increasing returns to scale. Top-line metrics are indicators of success but it’s not the only parameter on which the investment decision is based.
For the above mentioned businesses, there are the top-line benchmarks that have been observed in the market for seed and Series A rounds. When in doubt, I have set the bar a bit higher, fully knowing that there are exceptions where companies have raised these rounds with much less traction. Consider these milestones as a close estimate.
Milestones for Raising Seed & Series A Rounds
Seed Milestone: $250K — $1M revenue run rate
Series A Milestone: $5–$10M revenue run rate
Compared to other categories, fundraising for consumer transactionals has been affected the most due to the high investor expectations.
Series A milestones are higher than ever (around $1M/month in revenue), and they’re driving up the milestones for the rest of the seed investing landscape. Companies rarely can reach that kind of revenue milestone within 1.5 years of getting seed financing (unless they have initial traction and operational earnings under their belt). As a result institutional seed funds are raising their bar too.Due to this:
- “Pre-seed” investors have been seen to grab this opportunity, writing checks into companies with much less demonstrated market success.
- Some seed investors are also doing more “post-seed” and “seed extension” rounds to help companies reach the more aggressive Series A milestones. Often, there is something working with a company that is doing hundreds of thousands of dollars of monthly revenue, and thus would benefit from an additional seed-sized investment before a full-blown Series A funding.
Seed Milestone: 25K — 50K Daily Active Users(DAU’s)
Series A Milestone: 500K — 1M Daily Active Users
For consumer audience companies, It’s believed that the more important milestones are around growth and engagement versus overall top-line. Seed and A rounds can happen with more modest numbers if there is a belief that the product has hit a nerve(i.e. It’s usage is leading to addictive user behavior among users)
For example,There are a lot of cases where a company had insanely sticky users that led to rapid organic growth. The top line wasn’t as huge as other, more viral social products, but Series A investors were excited about the company because most of their users came back every day. The company had hundreds of thousands of DAU’s when raising their series A and this was their USP for raising funds .
Because these products can be built with pretty modest early capital but could have binary outcomes, It has been seen more cases where large series A funds have taken the risk and invested in these pre-launch. The relative dollars at risk for them is small, but the potential payoff that they might reap is huge. Large funds are in a better position to play roulette for these kinds of companies versus most seed-stage funds.
Seed Milestone: $10K — $50K MRR( Monthly Recurring Revenue)
Series A Milestone: $150K MRR; 12 months of promising cohort data
SaaS companies are often the most logical to evaluate. It’s very easy to do diligence of a SaaS investment and there ends up being tons of data available to benchmark a company, even at a relatively early stage. At minimum, an investor can compare the business to every other SaaS investment they’ve made during a similar stage of lifetime. If the company is not within the top 25% of the companies an investor has seen across most dimensions (revenue, growth, retention, LTV/CAC, etc), it becomes very difficult to rise above the noise.
Seed Milestone: Strong leader with a good team; Truly unique IP
Series A Milestone: Looks-like & works-like it’s prototype; commercial validation
Deep tech is typically very difficult for seed investors to be active in given the capital intensity that it demands and timelines involved. When an investor makes a seed investment in a company that has some deeply technical component, he/she realizes that they are rolling the dice at the next round even if the company hits or even exceeds all of its goals over the next 12–18 months. At that point, the demand for a company’s Series A ends up being driven largely by the perceived tailwinds of the broader market the technology is a part of.
This being said, in most cases, some evidence of commercial traction is necessary for a Series A to happen. This can take the form of pilot customers signed, crowdfunding raised, being a PR darling, etc. Even if it seems like the challenges ahead are 99% technology and only 1% business, series A investors will be grasping for each & every market proof points to help them decide to invest in the business.
This was the case for the portfolio company Optimus Ride. Part of what helped the company raise a $18M Series A despite still being in product development mode were substantial but unannounced commercial proof points that showed that large-scale, savvy customers were excited about what the company was bringing to market.
The takeaway from these guideposts is not to say that if you don’t clear them, your company will fail to raise capital but rather it should give you a sense of what your company is likely to be compared against. This should also help founders better think through their own future goals and fundraising strategy.
How to Raise Money Even When You Don’t fulfill these requirements?
Below we have summarized a list of important points that might help a company get by the requirements
1.Focusing on the total addressable market (TAM).
Entrepreneurs raising capital without traction, need to tell a story that illustrates how their total addressable market (TAM) is so attractive and ripe for disruption that future consumer adoption can be readily achieved.
In short, we can define TAM as the total revenue opportunity that is available to a company and/or product in the market today. This is often a critical component of many pitch decks, and investors look to it as a key determinant as to whether the potential to create a massively scalable business exists in an entrepreneur’s industry
2.Focusing on one of the most powerful sales tool: storytelling.
Yet another trick is for founders to focus on storytelling tactics to make their startup even more attractive. This can be particularly fruitful since humans are predisposed to listening & getting carried away by stories.
This is good news for early-stage startups without traction since story is usually the only thing left that they can focus on. By focusing on the origins and eventual destination of their startup, founders can actually make their business more attractive than if they had achieved traction, since investors’ imaginations about the potential for growth can sometimes seem limitless.
3.Draw comparisons to leaders’ companies in your space.
One of the most important tools in the entrepreneurial “pitch arsenal,” if you will, is the ability to draw comparisons between yours and previously successful businesses. If you do not have the metrics to raise at such an early stage, analogy is a useful tool to illustrate similar market conditions, customer dynamics and the potential for growth that other successful companies in the same stage of their cycle have already demonstrated.
Investocracy, a company focused on connecting startups from emerging markets with Japanese investors, produced this article.
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