Series A…Ready for it?
I’ve been engaged on a number of Series A rounds lately both directly and in speaking with founders and other investors in my orbit. There are a few things floating around in my head that I figured I’d try to suss out here and share in case they’re helpful to others. Would also love to hear what others are seeing.
At a high level, there’s a wide range of companies raising a round called “Series A.” It feels like there’s a lack of clarity as to what a Series A company should look like. Perhaps there’s always been this lack of clarity, but it just seem muddy right now.
In my mind, Series A is all about what’s working, what you’ve learned, and what you need to learn in order to scale. The high level questions are: (1) what have you figured out that you can pour gas on? and (2) what hypotheses or questions do you have that require additional resources to test and decide where to pour gas, either with this capital or future capital? Founders that can articulate crisp answers to these questions have an advantage.
I’ve seen a number of companies that feel too early for Series A but have already raised one or more seed rounds (seed is a phase). To me, a company’s readiness for Series A is not about a particular revenue target — I don’t know who created the $1m ARR = time to raise an A, but I think it’s done a disservice to the market and to founders.
Three things that I believe matter more than a specific level of revenue for Series A include: quality of revenue (whether at, above, or below, that $1m ARR mark), repeatability in your business, and customer love. There are, of course, other considerations like founder-market-fit, founder obsession with the problem, ability to attract and retain talent, potential for scale, a business model that can be profitable, timing, etc. But, for this post, I’m going to focus on the first three points as I believe they’re key for crossing the Series A chasm.
The following are some questions and thoughts that address these three concepts and help to answer the high level “gas pouring” questions mentioned above. There are no bad answers, it’s more about gaining a better understanding of the business and the inputs to a founder/CEO’s decision making at a stage where the company is highly resource-constrained and where focus and prioritization are imperative. “I don’t know but here’s how I think about it” or “I don’t know but I actually think X matters more” are great answers (for the right investor).
Quality of revenue
Maturity:
- how long has the revenue been live?
- are customers in pilot or annual contract? or somewhere in between? are key customers piloting multiple products? is the budget significant to them? are there clear expectations on how you convert from pilot to annual contract? if so, what signals do you have that you’re moving in the right direction?
Retention/expansion potential:
- NRR is a telling and helpful metric; it’s even more helpful when you unpack the drivers and churn/expansion dynamics that play into NRR.
- for B2B, have any of your customers been up for renewal? what did those conversations look like? if not yet, how are you preparing? what signals do you have on potential to land those renewals?
- what are the expansion opportunities in your existing customer base? what needs to happen to begin to penetrate that opportunity?
- do you have robust cohort data on adoption, engagement, and/or retention? what are the insights?
- do you have power users? what do you learn from them?
- what’s your north star metric when it comes to driving engagement and ultimately retention?
Recurring nature of revenue:
- Is “ARR/MRR” truly recurring?
- If you have a more transactional model, what trends do you see in your revenue that enable repeatability or some level of predictability?
Concentration: do a handful of clients drive most of your revenue?
Unit economics: do you have profitable customers? if you don’t, do you know the recipe? what does the timing/scale look like to get there?
Repeatability in the business
GTM:
- do you have a clear ICP? what are the open questions about your ICP? what data do you have? what data do you need?
- do you have a sales/acquisition playbook? what hypotheses have you tested? what have you learned? what are you still trying to figure out? what’s working/not working?
Churn:
- what are the churn dynamics? logo and revenue churn? regrettable v regrettable? ICP v. non-ICP? what patterns have you identified?
- what changes have you been able to effect based on learnings and adjustments you’ve made (could be product, positioning, customer support, account management/CS, etc).
Operations:
- do you have basic processes/systems/frameworks in place that allow you to communicate effectively across the team, gain insights, and move quickly.
User patterns:
- are your customers using your product in repeatable and predictable ways? what have you learned and implemented to drive in this direction?
Customer love
As a seed-stage company, your retention data is likely pretty nascent. Customer love is a key indicator for a strong product that can drive acquisition, retention, and expansion. It’s helpful to hear from customers, but it’s equally important to look at what they do. This includes identifying patterns in how they use your product, whether they suggest it to others internally and externally, and if they’re excited enough about it to bother asking you to build more features, etc.
Some questions to consider: Are your customers using the product in a way that you believe delivers value? Are adoption and engagement where they need to be? If not, what have you learned and implemented to address these issues? What hypotheses are you testing?
This can be mushy and qualitative, but you can build data around it. That data can help tell and strengthen your story. The right framework for evaluating customer love is different for each company. One trap investors can fall into is applying an inappropriate framework based on a tendency to pattern match. If your company doesn’t fit well into a box, build your own box and share it with investors so they have the right context and framework for you business.
Nothing is better than hearing directly from the source. Sharing recordings of customer calls, NPS data, and teeing up customers to speak directly with investors are effective ways to provide validation on customer love.
