After raising our $1.3 million seed round for Yipit, we raised $6 million a year later from Highland Capital, RRE, IA Ventures, DFJ Gotham and others.
It turns out that the process of raising a $1.3 million seed round and raising a $6 million round were different in a few key ways that we did not fully anticipate and we learned a lot.
Given the supposed “Series A Crunch”, I wanted to share some of those lessons as well as tips from other founders who have gone through the same process.
When trying to navigate the process of raising that next round, here are some things to keep in mind:
- It’s about the partnership, not just one partner. For most seed rounds, if you get a partner excited, that’s all you need. That’s not true for this round. You’ll need the whole partnership to be on board. Assuming you’ve gotten one partner excited about the investment, I’d ask to meet one-on-one with a few other partners and get them excited. That way, when you pitch the whole partnership, you already have several partners looking to do the deal. As you can imagine, partnerships are a complicated series of relationships and the more allies you have, the better.
- Have a big vision. My experience was that raising the seed round is about credibility. It’s about showing that you and your co-founder were capable of building something real and recruiting a team. This next round is a big round. Whichever VC firms leads this investment will make you one of their 20 or so main portfolio companies. They want to believe you are going to build a $100 million plus company and not a probable $20 million company. Instead of leading with your traction, you might consider leading with your bold vision. For example, if you were AirBnB, you might say something like: “Soon, more people will be renting rooms from AirBnB than from hotels.” And, instead, use your traction later to support your vision: “as you can see, we’ve had 10% growth in rooms booked for the last 5 months.”
- Don’t sign a term sheet unless you are certain they’ll do the deal. In the seed round, it seemed like once you signed the term sheet, things were pretty much done. In this round, the firm will do much more due diligence on your company, your team, your customers and your space. If you sign the term sheet, you’ll get locked down for 30 to 60 business days (1.5 to 3 actual months!). That’s a long time for someone to come back to you and say no. Worse, other investors will know that a VC firm walked away from a signed term sheet after doing due diligence. That doesn’t look good. Make sure they do their diligence up front. Make sure you have heart-to-heart with the partner about their biggest concerns and try to address those before you sign the term sheet.
- Know your investor’s target return. You want to know how much your investor is looking to return from their investment in your company so that you make sure you’re pitching the right firm with the right message. For example, do they expect you to sell for $100 million or $1 billion? You can always ask them but there’s a rule of thumb I use. It’s very rough, but it’s in the ballpark. When a partner commits to your company, they’ll consider your investment a real success if they get back 1/3 of their fund. So, if you’re talking to an investor with a $100 million fund. They’ll want your company to return to them $30 million. If they’ll get 20% of your company for the doing the deal, that’s a $150 million target. If the fund is $300 million, then they are expecting $450 million. Again, this is a very rough estimate but it’s helpful. For more on this, see this excellent post by Tomasz Tunguz.
- You might want to exclude strategics from the “no shop” provision. When word gets out that you are doing a funding round, strategics will start popping up and think about acquiring you for many reasons including that you’re about to become a much more expensive acquisition target and the social proof of a smart VC thinking your business is going to become really big. The “no shop” provision means that you’re not going to take the signed VC term sheet and try to get another VC to give you a better one. But, often, it also says that you won’t engage with any strategics about an acquisition. If getting acquired is something that interests you or your early investors, make sure to ask your lawyer to make it so that the “no shop” only applies to other VC’s.
- Your industry will not always be this hot. If you’re having serious interest for your next round, it’s likely that your overall industry is very hot right now (e.g., 3D printing, virtual currencies, content marketing, google glass apps, etc.). Unfortunately, all industries have their ups and downs. Before long, your industry will become cold again. If you don’t raise your round before that happens, you might be left out in that cold. Raising a round when your industry starts to weaken and having a competitor or two already funded will make your job much, much harder.
Whether or not there’s a Series A crunch, I don’t really know. What I do know is that raising a round after your seed round is much harder. I hope these tips will help make it a little less hard.
If you have your own lessons raising another round after your seed, please comment below!