My Co-founder and Partner, Scott Sage recently published two excellent posts on Late Seed rounds and A Note on Notes aimed at (though not exclusively for) European B2B entrepreneurs. Supporting enterprise entrepreneurs is something Scott and I have been doing for the bulk of our VC careers hence our passion for the subject. As Scott has blogged about the What and the Why, it seemed a natural progression to share our thoughts on the How.
So you’ve spent half of your Seed funding but still have 6 months of runway, your product is in the hands of early customers, most of whom are paying (hopefully you’ve reached a significant milestone of $10–50k MRR) and you are triangulating on clear early use cases and early metrics — it’s about the time as a Founder you start seriously thinking about the next slug of funding. How do you successfully raise your Post Seed round?
The first thing to say is, in my view, a key part of the How is the When.
When do you start the process of raising your Late Seed (or for that matter Series A) round? Answer — The day you close your Seed (or Late Seed) funding and not when you have 6 months of runway. Plant the seed then and nurture it in the intervening period so that when you hit the “6 month runway” point, you have a pre-selected pre-primed group of potential investors who are familiar with your story, have seen you progress and who have been socialising your company within their firms.
Prepare and plan ahead — the single most important aspect of the How (and maximising chances of success).
· Have a plan — Sounds obvious, but the euphoria of closing your very first Seed round and the need to focus on product/tech/customer priorities often times leads to the unintended consequence of deferring the planning for future funding. Before you know it, you are scrambling at the 6 month runway point. So, have a plan which maps out timelines and key activities e.g. milestones, target investor(s) and outreach and key execution items.
· Research and target the investors precisely — whilst it’s important to cast your net widely, it’s just as important to have a target group, whom you have researched for fit (i.e. appetite for and track record of investments in your space, stage, geo, size), referenced, got the required warm referral to and with whom you then create a dialogue with ahead of formally starting the process.
· Milestones to hit — set realistic and meaningful value milestones that you will execute on and that will get prospective investors excited about investing in your Late Seed round. Needless to say, this also has a direct bearing on valuation (though this is a subject for another post I think!)
Have a clear Ask — be clear about how much $/£/€ you are raising, which is reflective of both your current state and the value milestones you can deliver on prior to a successful Series A.
A mistake we commonly see in Europe is founders looking to raise large Late Seed rounds which are disproportionate to the company’s ability to absorb and intelligently/efficiently deploy. This then surfaces questions of balance between capital efficiency and scaling ahead of the curve/readiness; valuation/dilution and most importantly whether the company has a clear sense of what the core execution focus needs to be in the build-up to Series A. There’s a difference between going out with an ask that’s too large that raises questions vs. being oversubscribed because you succeeded in creating more demand for your equity and then expanding the size of the round at that point (which I am also firmly in favour of).
Have a Plan B — fund raising is tough at the best of times and can be adversely affected by things outside of your control. I would encourage you to have a clear sense of the appetite/support from your existing angels/investors and therefore what plan B would like if you only raised from them. Put yourself in a position where you have an alternative.
Closing the round — is all about creating momentum and excitement; in truth if you planned ahead and executed to the plan, are delivering against or exceeding your milestones and have a Plan B, momentum will take care of itself. Landing the Lead/Anchor coupled with keeping the window short but realistic with rolling closes (especially when you use a Note) is the most effective means we have seen. The Lead will then help you get to the close.
Don’t forget the hygiene factors — a strong Deck, a full Plan (people, product, projections, use of funds etc), customers prepared to be referenced.
Building a successful company from scratch, is a path littered with many obstacles and bumps in the road, most of which are unpredictable and the way to navigate around these is to create optionality at every stage, which I hope is apparent as the thread that runs through the whole of this post — if there’s only one thing I would love for founders to take away from this post, it’s this.
Thanks to Scott Sage for his contributions to this post.