Agile VC: 

My idle thoughts on tech startups

What Milestones Are Needed to Raise a Series A?

Lee Hower
August 12, 2011 · 3  min.

For entrepreneurs seeking to build big companies on a rapid trajectory, raising larger scale venture capital rounds is likely a necessity at some point after the initial seed funding.  At NextView, we spend a substantial portion of our time trying to help our portfolio companies prepare for growth as “venture scale” businesses.  Also a lot of other entrepreneurs frequently ask us questions like “What milestones do I need to hit to raise a Series A round from a larger VC fund?”

The challenge is that while there’s a simple answer, it’s not one that can be easily distilled into a set of metrics that can be followed as a cookie cutter plan.  The simple answer is “be able to convince a partnership of smart investors that your startup has a good probability of being a $100M+ revenue company within 5ish years.”  If this isn’t a reasonable probability, your startup might be a great business but probably is not well suited to VC funding.

For many entrepreneurs, even very savvy and experienced ones, this is a dissatisfying or even frustrating answer and I can appreciate that.  Life as an entrepreneur is hard enough and it would be vastly easier if you had a specific, quantifiable set of things you had to achieve in order to raise a Series A round.  But unfortunately there’s no magic formula… not getting X million users if you’re a consumer facing startup, or Y customers if you’re B2B SaaS startup, or Z revenue, or whatever.

So if there’s no absolute truth or concrete milestones to this question of Series A, what can entrepreneurs do to further their goals?  I was in a board meeting for a seed stage company recently and a successful GP at a larger fund said “you know it when you see it” which is true.  And there are some common precepts seed stage companies can follow.

1) Core team ready to scale – At the first round of larger scale venture funding, investors fully expect there will be more additions to the team to help it grow.  But if the current team doesn’t provide a foundation to build upon, many will be unwilling to take the risk.  This isn’t code for an “experienced CEO” or whatever.  But having a single senior leader is certainly inferior to having 2-3.  Having little or no domain experience among the team means a steeper learning curve in disrupting an industry.

2) Demonstrable market size – Sometimes it’s obvious to potential investors your startup is pursuing a large market oppty (TAM measured in billions).  But even if it isn’t, you can prove smaller pieces of the puzzle to reduce the leap of faith an investor must make.  If a tiny startup can get a few dozen paying customers in one small segment of a larger market, then there probably is a larger market.  If Google just announced an initiative in your market segment, that’s probably good validation.  This aspect is often the hardest to “prove” to a VC, but the more complete you can make the composite picture the better obviously.

3) Repeatable, cost effective customer acquisition – Nothing whets a Series A investor’s appetite like a startup that’s shown $1 of incremental marketing spend will yield $2-3 of gross margin.  But even if you haven’t fully established the “cash register” of customer acquisition, showing that you have a clearly repeatable approach on trend towards profitable growth may be sufficient.

4) Metric momentum – Everybody likes those up and to the right graphs.  Whether it’s customers, revenue, user acquisition, investors are more likely to be convinced when your startup has a good near past (last 3-4mo) trajectory.  Also being able to show a solid dashboard and good grasp of your own metrics instills a sense of confidence in new investors.

5) Plausible monetization – If you’re an e-commerce or B2B SaaS company, it’s harder to raise a Series A as a pre-revenue company.  But for other types of startups, particularly consumer-facing ones, a pre-revenue Series A may be entirely appropriate and feasible.  In these cases you have to be able to layout a credible plan for monetization though, which will likely involve several approaches.  I don’t mean just putting the words “freemium”, “virtual goods”, and “advertising” on a slide.  I mean a thoughtful and specific plan of the 3-4 approaches you plan for revenue (a little data on small scale tests rarely hurts).  We were post-product but pre-revenue when we raised LinkedIn’s Series A, but we laid out a specific plan around jobs/hiring and premium subscriptions which form the basis of nearly 70% of LinkedIn’s revenue today.

There’s no magic formula for a successful Series A unfortunately.  But these five tenets can help internet / software entrepreneurs increase their prospects.

Lee Hower
Lee is a co-founder and Partner at NextView Ventures. He has spent his entire career as an entrepreneur and investor in early-stage software and internet startups.