You’ve successfully led your firm through early stage startup funding and are now ready to enter the Series A venture capital round.
You have a proven product, a solid user base, and a consistent revenue stream.
With the support of a Series A venture capital investment, now could be the ideal time to make a push toward massively and rapidly increasing your growth.
Once you’ve decided to take the plunge, one of the most important phases will be determining with which venture capital firms you want to partner.
How do you identify, target, and effectively recruit the correct venture capital firm for your Series A venture capital funding?
Because you’ve come this far with your firm, you’re already fairly experienced in dealing with investors and know what you’re looking for in a financial partner.
Finding the ideal venture capital company for your Series A, on the other hand, presents a unique set of obstacles that many founders have not yet confronted.Thousands of dollars are frequently raised by early-stage enterprises from angel investors, partners, and private individuals.
VCs, on the other hand, are frequently willing to invest millions of dollars in companies they believe in. As of 2019, the average Series A startup is worth $22 million, with a capital round of roughly $13 million.
However, regardless of how crucial money is when raising Series A venture capital, it is far from the only thing your company should consider when selecting a VC. Consider the value an investor brings to the table in addition to financial support, since their network and expertise may be just as critical to your success.
When looking for the proper venture capitalist to partner with, firms must consider the full package they bring to the table, not just the amount of money supplied but also their core capabilities, values, and expertise.
Whether your business is a hot commodity and you have your pick of several top venture capital firms or you’ve only received a few offers from local investors, you’ll have to go through a similar thought and evaluation process when choosing a VC partner.
In this post, we’ll go over some of the apparent and not-so-obvious issues to consider while looking for Series A venture capital funding. Let’s look at where to look for potential VCs, how to identify suitable fits, and what to think about when deciding who to approach.
Online Resources that are Helpful
As we stated in our previous blog post about fundraising considerations, speaking with your Seed investors and partners, as well as networking with peers, will always be considered smart practices when attempting to identify VCs who would be good to target for your Series A venture capital fundraising.
Fortunately, entrepreneurs looking for venture capitalists (VCs) who suit their needs have access to a wealth of online tools and services.
These tools can help you create an initial list of businesses that you believe would be a good fit for your startup, as well as provide you with the information and understanding you need to filter that list down to a reasonable number of possible investors.
Let’s examine a couple of these tools and discuss their significant characteristics, advantages, and disadvantages.
- Crunchbase Pro
The goal of Crunchbase is to profile startups and their transaction history. In-depth details regarding funding are also available, along with information on leadership roles, mergers and acquisitions, and business news.
This can give you an idea of what companies in similar industries and fundraising stages are doing. Detailed profiles for VC funds, accelerators, and other investment companies are also available. Crunchbase also provides thorough ranking lists of the top VCs on its website.
The Pro version includes advanced search and tracking options that make Crunchbase considerably easier to use.
- Insights from CB
CB Insights analyzes huge volumes of data on venture capital and startups and provides comprehensive market analysis and trend forecasts.
It can assist you not just in learning more about your industry as a whole but also about your competitors and the VCs you’ve identified as a preliminary fit.
The most widely used business-focused social network in the world, LinkedIn lets you search the “Venture Capital and private Equity” sector and create a list of VCs who seem like a good fit for your objectives.
It’s also an excellent way to network with other peers and venture capitalists. You can also learn a lot about partners and VCs by following them and seeing what kinds of content they publish and discuss.
- Mattermark
The original plan for Mattermark was to provide VCs with a data platform to measure startup potential. It can give you helpful information about how venture capitalists see your business and how you might rank in their startup hierarchy.
- Gust
Gust’s platform, which has been compared to Match.com for startups, matches your firm with the VCs who are the best fit based on your criteria. While thorough study and due diligence are the best techniques to locate the ideal VCs for your Series A, the suggestions provided by a tool like this are undoubtedly worth considering.
Important Factors to Consider When Evaluating Venture Capitalists
Before you start reaching out to your favorites and eventually begin pitching to them, let’s discuss a few of the various factors you should take into account while studying and evaluating which venture capital firms you would be most interested in working with.
- Product and Industry Fit
In terms of the types of companies they choose to support, most venture capital firms have a distinct concentration.
That is why it’s a common practice to compile a list of VCs who are likely to be interested in your company, both in terms of industry and product.
Look for organizations with a proven track record of investing in your market, as well as those that have previously worked with startups with similar revenue growth, user base, and product fit.
While most major VC funds have made a concentrated effort to diversify their portfolios in recent years, conducting enough research should give you a solid understanding of the types of firms they are searching for across a wide range of industries.
2) Fitting the Stage
When deciding which firms to fund, many VCs focus on various investment stages (Seed, Series A, Series B, and Series C).
To boost your chances of attracting their notice, select a company that is actively looking for deals with companies in your stage and prefers working with Series A startups.
3) Alignment
Are you and your potential investors on the same page in terms of where you want to go?
Do they agree with your product roadmap, or do they believe your potential lay in going in a different direction?
And, if you don’t completely agree on where you want your company to be three years from now, do you trust their vision and track record enough to take their advice?
4) Track Record
Not all venture capitalists have a good reputation in the startup community.
The good news is that the startup community is tiny and close-knit, which means you’ll be able to assess potential partners rather readily through networking.
Don’t be scared to approach founders who have previously dealt with various VCs and evaluate their feelings about their connections and experiences.
If at all possible, try to speak with entrepreneurs from their portfolio whose companies did not achieve their objectives.
Relationships are easy when everything is going well; go deeper and observe how these VCs react when things aren’t going so well.
5) Expertise and connections
The money you’ll get from an investor is simply the tip of the iceberg. What’s more, you’ll be able to tap into their network and knowledge, which will be beneficial to your growth.
Having someone in your camp who has extensive experience helping startups effectively scale and has a vested interest in your success can be enormously beneficial.
Furthermore, if you already know that you plan to pursue Series B and possibly Series C funding in the future, make sure the VCs you are considering have a solid track record of assisting startups that have successfully raised additional funding from similarly reputable financial institutions or from other sources with relative ease and speed.
6) Autonomy
If you place a high value on staying true to your vision, you should look for a venture capital firm that has a track record of believing in its portfolio firms and giving them the necessary infrastructure for assistance.
You should be able to tell from past conversations and questions whether the VC fully supports your goals and objectives. A board that believes in you and your goal but is also watchful about offering you advice and ensuring that you’re always headed in the correct direction needs to be balanced. Nobody desires a VC partner who is uninterested.
7) The Terms
Don’t limit your analysis of a term sheet to the evaluation and amounts offered; a deeper examination of the document might reveal a great deal about the VCs that supplied it to you and their goals.
Is the offer simple to read and comprehend, or are there a lot of fine print and ambiguous terms? Do they appear to be attempting to force you to accept something you’re not comfortable with?
Don’t anticipate things to get any less hectic later on if the initial paperwork for the Series A venture capital funding is overwhelming you.
When Is the right time to obtain series A funding?
Knowing when you’re ready to raise capital has little to do with intuition. It’s all about the numbers. What are some of the metrics that VCs usually request from you? They will, of course, want to see that you are already making money.
It is not the VC’s responsibility to assist you in locating your market fit and clients. If you haven’t been successful in doing so, it’s unlikely that a venture capital firm will be interested in investing in you.
Are You well-established in your particular industry?
Demonstration of product and market fit is crucial. At this point, you should be able to see unequivocally that you have consumers and that there is a legitimate market need for your goods or services.
You must demonstrate that customers are prepared to pay for your goods or services and that they fulfill a need in their lives. If this is the case, you ought to witness clients not just purchasing and utilizing your offerings but additionally endorsing them to others without the requirement for inducements.
Do buyers interact with your product? As you convert more clients, you should also be receiving feature requests and comments all the time. This is another indication that you are headed in the right direction.
Possessing an in-depth understanding of your market is also crucial. The ability to passionately and plainly instruct others about your market is also very crucial. Having a working grasp of every market and business they invest in does not make an investor an omniscient entity.
The main things that venture capitalists will want to know about your market are its size and potential size. Make sure you prepare this kind of data and do your homework. Make sure you have hard evidence to back up your statements regarding your startup’s market fit and prospects by using tools like Statista Industry Reports and Crunchbase.
Are Your Financial Projections Friendly?
It is also critical to have a highly clear financial plan to show potential investors. Budgets and economic forecasts for the next three to five years are required and welcomed, but VCs will want more granular data to understand how your company spends and earns money month after month.
While the numbers are undoubtedly the most crucial aspect of the equation, being able to compile precise and easy-to-understand financial information and projections will earn you extra points with VCs who, like it or not, are judging every single move you make.
Detailed plans are appreciated by venture funders as they provide reassurance that you will report your financial activities with the same diligence that you do with your own. Furthermore, if you can use data to clearly illustrate your startup’s strengths and flaws, investors will be able to see that you have a firm, objective understanding of what your company is doing right and wrong as well as the areas that require attention moving forward.
Are your acquisition costs for new customers adequate?
The amount that VCs are typically most interested in learning about is your client acquisition costs, or CAC, if we had to pick just one.
VCs will be especially interested in learning about your startup’s cost-per-acquisition (CAPC) in relation to lifetime value per customer (LTV) if it is an eCommerce company or a subscription-based SaaS product.
For instance, in order to break even, you need a customer to stick with you for 20 years if it costs you $500 to get them to subscribe for $2 a month. That CAC would surely make you bankrupt very soon and will not impress anyone.
Usually, venture capitalists expect to see your firm turn a profit within a few years, with thousands of dollars per customer. This gives venture capital investors peace of mind that you will be able to quickly recoup their investment and, ideally, turn a profit on it as well.
If you’re spending more money to recruit customers than you can be sure you’ll make back in a reasonable amount of time, then potential investors won’t care that you have a million clients.
Are you earning enough?
If you don’t have $1 million in annual recurring revenue (ARR), you’re probably not ready to pursue Series A funding. However, even if a software company isn’t making enough income, it can often wow VCs by demonstrating that it has created a strong core of active users, which often bodes well for showcasing a product’s potential for exponential development.
That is the crucial point. If you want VCs to take notice, your growth must be exponential. Many VCs expect you to double or quadruple your income year after year. So, if your revenue in March 2023 isn’t two or three times what it was in March 2022, you’ll have to dig deep to offer these VCs other data that proves why your firm is worthy of their investment.
Series A financing from venture capital is significant. It entails millions of dollars, long-term collaborations, and, ideally, will propel your startup’s growth to unprecedented heights.
Of course, the ultimate goal when looking for Series A venture capital funding is always to get more money on better terms, but occasionally it might be worthwhile to burn some cash or give up some stock in order to collaborate with the right people.
Equally significant are alignment, expertise, and credibility. Recall that these are committed relationships that are not to be hurried into.