MaRS Library Taking your Series A pitch on the road: Are you ready for prime time?
Who should read this?
Founders and managers of growth-stage companies.
When it comes to financing, there’s less understanding about what Series A investors seek. Many entrepreneurs feel the waters get murky after angel funding and VC seed rounds.
Understanding Series A investors matters if you want to close the round
Angels and seed investors often commit capital on the basis of a great story and perceived potential. But the expectations of Series A investors are significantly greater.
They’ll want to see evidence that there’s more to the story than a compelling PowerPoint deck and founder charisma. There are 20 startup founders seeking Series A investment for every one that successfully lands a term sheet.
Knowing what Series A investors expect will help you in closing the important Series A round.
Before you pitch for Series A, you’ll need these three things
Understand the specific, quantifiable and historic performance metrics that align with the standard in your vertical and with Series A investor expectations.
For example, if yours is a SaaS model, investors will expect to see trailing year and current KPIs, including churn rate*, MRR, CMRR, CAC, CLTV and so on. These are all indicators of core business growth and provide a means to predict near-term trends and potential.
Series A investors place a high priority on the team. Seed investors may back a single founder on the basis of technical or subject matter expertise, or his/her track record, and expect gaps in your team. But Series A investors are different.
They expect you to have filled those gaps and recruited the core functional team required to scale your company. This might include senior managers for areas such as tech/R&D, finance, operations, product development, and sales and marketing. Many investors with whom I have worked will invest in a high-performing team and overlook shortcomings in product development and sales traction.
3. Customer validation
If you have burned through your angel and seed round capital, and still can’t demonstrate customer validation, you’ve got a problem. While the level of customer validation required differs among investors, there are some general rules of thumb.
If you have ramped to $5 million in annualized revenue (e.g., bookings, MRR, contracts), I’d say you’re well positioned to pitch for a Series A round. Depending on your growth rate and sales pipeline, you might attract investment with as low as a $1 million in trailing revenue. If I were pitched on the basis of $1 million trailing, and clear visibility to $5 million in projected year-end revenue, I’d definitely lean in and continue the conversation.
Additional resources for Series A
- When to Raise a Series A (blog, Y Combinator)
- How to Raise a Series A Round (blog, Techstars)
- The Metrics Required for Raising a Series A Round (blog, EquityZen)
- 10 Metrics Every SaaS Company Should Care About (blog, HubSpot)
*Churn rate: The churn rate (or, rate of attrition) is the percentage of customers who end their contract/subscription with you within a certain period.
MRR | Monthly recurring revenue: MMR is the measure of predictable, recurring revenue coming in monthly for the duration of a product subscription or contract. To calculate MRR, multiply the total number of paying users by the average revenue per user, per month. Or, if you know the annual recurring revenue (ARR), you can simply divide it by twelve.
CMRR | Committed (or, contracted) monthly recurring revenue: This is a projection of MRR in a future period. It differs from MRR in that it factors in guaranteed business growth (e.g., known account upgrades) or expected business downgrades or churn in that same period.
CAC | Cost of acquisition: This refers to the total cost a business incurs, including the marketing and sales efforts, to acquire a new customer.
CLTV | Customer lifetime value: CLV refers to the amount of profit a single customer will generate for your business over the length of time (in years) that they stay your customer. (To read more about CLV and get some handy tools to calculate it, check out How Valuable Are Your Customers?)
- Subscription agreement (angel or venture capital investors): Sample template for Ontario startups.
- Digital video & music.
- Startup funding and capital for your business: How much money to raise?.
- Elements of a term sheet: Funding, liquidation and corporate governance.
- Stages of company development: Angel, seed and venture capital investors.