I spend a lot of my time helping founders in our portfolio plan for future fundraises. Given that we focus on pre-seed and seed-stage companies, much of the fundraising focus is on what it takes to unlock a Series A round of financing. Most of the founders I work with want to know what metrics or KPIs they need to hit to unlock the Series A round. I get why founders want to know the answer to the test, but in my experience, fundraises don’t work that way. Here’s what I tell founders when they ask me what they need to hit in order to unlock the Series A round:
There is no magic number, in terms of revenue or KPIs, that will unlock a Series A round by itself. Metrics are just one of many inputs that go into the decision.
I have read many Twitter posts, LinkedIn articles, blog posts, and other articles talking about what it takes to raise a Series A. Most of those posts focus on the metrics (usually customers or revenue) that a company needs to clear to raise a Series A round. We have had over 80 companies raise Series A round at Precursor, and each company had its own journey to get there.
I have also come to appreciate a few other things about raising Series A rounds (or any fundraising round for that matter) that I hope help founders who are on the fundraising journey:
Revenue is a coarse, imperfect metric. Revenue, on its own, is a very coarse metric. To fully understand a business, most investors want to understand margins, cost of customer acquisition, sales efficiency, growth rate, churn, and other KPIs that round out the picture. Focusing solely on a top-line revenue metric as a goal doesn’t tell the full story of the quality of the underlying business.
Startups are more than a bundle of KPIs. A startup company is more than just a bundle of KPIs and numbers. If startups were just a bundle of KPIs, fundraising would be fairly deterministic – you could plug those numbers into a spreadsheet and make a decision. The team, product, and market opportunity all matter as much, if not more, than the metrics, particularly in the earliest stages. Think about the current enthusiasm for AI-related startups. Many of those companies are raising large rounds, not based on metrics but on investor belief that those companies will become large, valuable businesses in the future.
Asking a Series A investor what they want to see to yes obligates them to say something. If you ask an investor what metrics they want to see at Series A, they will likely be able to tell you what would make you competitive in the pool of opportunities they see. Still, they likely cannot tell you what metrics your specific company needs to hit. I don’t think most investors know what they want to see in a potential investment until they see it.
It’s hard to draw conclusions from other people’s fundraises. Reading headlines and news about the metrics (or lack thereof) other companies had when they raised their Series A rounds won’t tell you much about what your specific startup would need to achieve to unlock a round. It’s very hard to know exactly why a given investor or set of investors ultimately said yes to an investment unless you were part of the process. These articles also won’t tell you about the many companies with stronger metrics that weren’t able to raise; nobody writes articles about those companies.
Revenue should be an output, not a goal. For our most successful companies, revenue is usually the output of a working business model that delivers customer value. Chasing revenue for revenue’s sake, particularly revenue that isn’t correlated with your core product or service offering, isn’t highly valued by investors and you’re unlikely to get credit for it when you’re raising.
Sometimes metrics are just confirmation bias. In some cases, investors really want to invest in a company for a myriad of reasons. In those cases, whatever level of traction the company has (including none) becomes confirmation bias and supports an investment decision that has already been made. It’s tough to draw too many conclusions from these rounds; this often happens in really hot categories or with repeat or high-reputation founders.
There are a few things that I think do seem to correlate with raising a Series A. I say these things with the clear recognition that they are highly subjective:
- A clear path to building a large company with a $1B+ terminal value, as judged by the investors from their point of view
- Be in the top 5-10% of opportunities in that VC’s pipeline of companies
- Strong founding team that investors believe can take the company to the next level