Fundraising: The differences between Series A and B
How Series A differs from a B round, and how to put your company in the best place to raise money. Hugo Grimston, chief financial officer at software firm Paddle, which recently closed a $12.5m Series B, shares his top tips.
As CFO of Paddle for the past three and a half years, and having spent a decade in financial services before that, I have spent most of my career either fundraising or running similar processes.
At Paddle I have helped manage 2 Seed rounds, a convertible bridge round, a Series A, and now our Series B.
So, here are some pointers on the differences between A and B rounds and also how to best prepare yourself for a successful fundraising round.
How do they differ?
The key differences, in my experience, are:
1. There are fewer funds in London and Europe who can write a $10m+ cheque versus a $2-5m cheque, and only a handful of world-class funds who can really add value.
2.After you get the A round, you’ll suddenly get loads of inbound interest from VC funds. FOMO is strong in the venture community (no-one wants to miss the next unicorn).
3. At Series A you will have product market fit but you probably haven’t built a repeatable go to market strategy. At Series B, it is easier to demonstrate real traction and conversely harder to hide behind vanity metrics.
4. Linked to the three points above: Fewer funds, better visibility in the market and more traction means less time wasted and can lead to an accelerated process. As context, Paddle’s Series A round took almost five months from initial meetings to term sheet; our Series B round took around two months.
5. At Series A, the focus of the VCs is all on the founders. By Series B the team that the founders have built around them becomes more and more important. Scaling a company from one to 10 people can be done force of will alone. Building a team of 50 to 100 people and beyond requires real leadership and a strong supporting team.
6. Due diligence gets more intense as the cheques get bigger. Be prepared to share detailed customer information, offer up customer calls, have the VC meet all key people at the company before term sheet stage. Once the term sheet is signed, the diligence tends to be more legal and financial oriented (albeit very detailed) and may also include personal references on the management team.
How to position yourself
Constant dialogue: Maintain a dialogue with a small number of investors that you think can really add value to your company (not just provide the capital). This may be as a great advisor or mentor, or through domain expertise, their rolodex or because you’re expanding into a new geography. Even if you’re months off fundraising it’s worth making the time. Investors like to be kept in the loop and given regular updates on progress. Also, if they think they can pre-empt a process, it gets their competitive juices flowing.
Be open and transparent: Be honest and straightforward with potential investors, anything else is just poor practice and you’ll get found out sooner or later. Be up front about timing and whether they’re getting privileged access. Also, don’t be afraid to share some metrics with them. We put together an investor dashboard which contained some basic figures which we updated monthly and sent to investors with some commentary (MRR, no. of customers, ACV, Churn etc.). Not sufficient for their diligence or containing anything commercially sensitive, but enough to keep them in the loop and Paddle front of mind.
Full commitment: Once you decide to launch a process move heaven and earth to get it done. Get on that plane. Take those meetings. Push to hard deadlines. This may seem an impossible task, given that you’ve got a business to run and are already doing 100 hour weeks. But you’ve got to find a way. Momentum is everything.
Do the heavy lifting up front: When we decided that we were going to go for it, we front loaded our preparation. This means that you’ll be as ready as you can be for any curve ball information requests during the process (as you’ll have nailed the essentials). To get to Term Sheet stage you’ll need (as a minimum) an Investor Deck, a valuation underpinning the amount you’re looking to raise and a three year financial model. Beyond Term Sheet you will need a data room containing a bunch of dull but important information covering statutory information, IP, financials, employees, contracts etc.
Getting Series A funding is great, but in reality all it means is that you get 12-18 months to prove your model before raising a Series B.
According to Crunchbase data, approximately 45% of Series A funded companies in the US fail to raise a Series B.
The best way to avoid the graveyard is to build an awesome product that delights customers and to have persuasive founders who can convey a compelling narrative about how their success is inevitable.
Obsessive preparation won’t be the main reason for a successful raise, but it can help you to avoid screwing it all up.