Your Series A Readiness Scorecard

By February 28, 2020Fundraising
series a ready

Founders often ask me how much revenue they need to generate to be ready for a Series A.  The question is so common that I previously wrote an article just on that (“Series A Sweet Spot Combines Size & Slope”).  But by doing so, I actually fell into a trap that I often caution against.  Revenue and revenue growth are definitely important, but aren’t the only things that matter for being considered “Series A ready” by venture fund investors.

In today’s age, a Series A-ready company is still small and somewhat risky in the grand scheme of things, yet also rounded out in a variety of ways that I will explain in this article.  I’ll start by describing some attributes of “rounded out” and then suggest a framework for translating that into your own version of being ready for a Series A round of funding.

For more information about the differences between a seed and Series A round of funding, read my article titled “A Series A Isn’t Just a Large Seed Round“.

Rounded Out

A Series A is often the first funding round that involves an institutional investor such as a venture fund.  To catch their attention, you’ll need a fairly complete operational dashboard with trended results for all KPIs.  You should have regular strategy and planning meetings leading into a Series A, and you might even have practiced holding quarterly board meetings, even if just with the founders and one or two advisors.

Coming into a Series A, most key functions will be filled with full-time employees.  The total team size might be as small as 10 or as large as 30, depending on the company’s business model. A lot of Series A investors want to see $1–$2 million in annual revenue, because that is a level that demonstrates a repeatable and at least somewhat predictable customer acquisition process for most business models.  Those targets can vary widely depending on the type of business (software versus hardware, B2B versus B2C, etc.), so only take it as a broad rule of thumb for stage-setting purposes.

The culture of a Series A ready startup usually isn’t mature and sometimes not even fully-definable.  But there should be some founding principles (see related article) and a sense of “how we do things”.  There are processes and tools for keeping the company organized, informed, and pointed in the same direction.

Beyond those basics that likely apply to most Series A ready startups, there are numerous other attributes that could make a startup attractive for this important round of funding.  Below are some examples, to open the aperture a bit:

  • Important strategic partnership – Perhaps just recently signed but hopefully generating benefits.
  • Evidence of land-and-expand strategy working – Startups that sell to large enterprises often have this sales and revenue expansion strategy.
  • New geographic markets launched – If a geographic expansion strategy is important to your growth, then successfully launching additional markets could be important.
  • Patent filed – Assuming it’s important to your strategy and gives legitimate leverage.
  • Positive advance with important regulatory approval (FDA, etc) – Along the way to full approval are various milestones and sometimes formal feedback from the reviewing authorities.

Missing from the List

There are lots of other things a Series A ready company might have accomplished, but don’t specifically contribute to their Series A fundraising success.  I often refer to those accomplishments as general bragging rights or “cocktail trivia”.  What you didn’t see mentioned before are things like the following:

  • Press or media coverage
  • Awards
  • Acceptance into an accelerator program
  • Quantity of website visitors or social media followers
  • Verbal indications of interest from a potential customer or strategic partner

Create Your Own Scorecard

During a recent board meeting, the company CEO engaged us in a discussion about the needed criteria for being attractive to future Series A investors.  She already had a list of significant things the company planned to accomplish.  As we asked questions and generally brainstormed the topic, we identified some other reasonable accomplishments that should be impressive to Series A investors.  That dialog gave me an idea.

The full list we came up with included more accomplishments than should be needed for the company to successfully raise a Series A.  In other words, only a subset would be needed – but which subset?  Not all items on the list were of equal significance, which means the combination of accomplishments matters.

I commented to the group that each item on the list has a relative weighted value and the sum of the accomplished items needs to meet some hypothetical total to be considered Series A ready.  Driving the result higher than that minimum bar likely means driving the company’s valuation higher.

Imagine if achieving a score of 100 magically results in your startup being Series A ready.  What potential accomplishments would you put on this list and what sort of relative score would you assign to each?  The accomplishments can be anything from financial and operational results, product-related accomplishments, levels of operational maturity, and all sorts of things that your future Series A investor might care about.  With this information, what combination of accomplishments would get you to 100 points?  A miss of one desired accomplishment could be offset by achieving another item on the list.  You just need to get to 100 points.

You might consider some of the accomplishments fundamental to your business plan and absolutely required.  No problem, lock those in on your target list rather than consider them exchangeable.

Like a Poker Hand

In poker, certain combinations of cards determine winners versus losers.  The key is to assemble the best collection of cards to make the highest-ranked hand.  An ace is generally a great card to get, but not when it is combined with four other random cards that cause the ace to be the only interesting card in the hand (ie – high card hand).  A two is generally not an exciting card to get, but when it is combined with four other cards of the same suit (flush hand) or three other twos (four-of-a-kind hand), a lot of games can be won.

What is your equivalent of an ace card?  How would you build your own winning hand?

Examples

To help visualize how the exercise might look, check out the 100-point scorecards for two Series A ready startups, Shockwave VR and Surf Shack AI.

Shockwave VR

  • 50 pts  $1.6M in ARR and a 150% CAGR over the past two years
  • 20 pts  Repeatable and somewhat predictable customer acquisition method
  • 20 pts  Significant Fortune 500 customer landed, with significant revenue upside potential
  • 10 pts  Land-and-expand revenue expansion strategy achieved with three enterprise customers

Surf Shack AI

  • 30 pts  First and second geographic markets operating with success, third market just activated and tracking even more favorably for most KPIs
  • 20 pts  Two out of four company executives have prior exits in the same market
  • 20 pts  Strategic partnership just move from MOU to signed agreement and with big potential
  • 20 pts  Mature management system, operational processes and systems/tools
  • 10 pts  Well-known industry veteran added to board of directors

Summary

This is obviously just a conceptual framework and not something a Series A investor will recognize in the way it’s described here.  In other words, please don’t start a presentation to a Series A investor with “We’ve reached our 100 Series A points target and are ready for you to lead our round.”  Instead, use this to foster a healthy discussion and debate with your executive team, advisors and board directors.  I think you’ll find it useful.

 

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