6 ms·

Series A Fundraising Guide

107 points by gtzi 8y ago

dustingetz 8y ago
"(investors aim at an ownership percentage and are willing to pay what will get them there)" What is the reason for this?
- PanosJee 8y ago
  Calculations that help them understand their possible returns on a company & fund level
- jasode 8y ago
  I think that paragraph is somewhat confusing for the intended audience. Anyways, VCs at series A want to buy enough equity percentage (e.g. 15% to 25% ownership) to make their exit numbers work. Investing a smaller amount to only get 5% of a company is not a "meaningful percentage" or "meaningful stake". (In contrast, YC does buy a smaller 7% equity but their $150k isn't considered "Series A".) To me, talking about investment scenarios in terms of "valuation" always seemed to make things more difficult to understand. The following math is equivalent but I think the explicit percentages layout is easier to grasp in a few seconds: Mark Z is considering 2 offers of investments for his young Facebook startup in 2005: Don Graham offers $6 million at a $60 million post money valuation. Accel Partners offers $12.7 million at a $80 million post money valuation -- or -- Don Graham offers $6 million for 10% of the company Accel Partners offers $12.7 million for 15.7% of the company
  - dustingetz 8y ago
    Yes that is what they say ("make exit numbers work") but the math is elastic here so, that explanation does not check out, or at least something is missing.
- brandnewlow 8y ago
  When investors raise their funds, they pitch a specific model to their LPs. Example: "We're going to invest in a basket of startups whose aggregate value will be $X billion in 5 years and we will own Y% of those companies at that time." If they can't hit that Y number, they are not doing what they said they'd do.
- jm20 8y ago
  Most lead investors at the series A level look to take a board seat, and spend a lot more time per-company than at the seed round. There's a finite amount of time in an investor's day, and somewhere around 20% ownership of a company is, for whatever reason, considered the magic number where it's worth it to spend that much time with them (through assistance, board meetings, etc).
- martinshen 8y ago
  I believe investors aim at ownership percentages at Series A mainly for pro-rata. Lead Series A investors usually get pro-rata rights. Generally, the wisdom in startup investment is to double down on your winners and you typically can only do so if you have pro-rata rights. In other words, if the startup does super well, that VC will likely invest 10x more in real dollar terms to upkeep their pro-rata. Take 2 pretend funds: CoolVC has a 20% target ownership and CheapVC has a 10% target ownership. They do their pro rata every round. Rocketship Corp. will have the following rounds (super simplified): Series A @ $25M post-money Series B @ $100M post-money (15% dilution) Series C @ $600M post-money (10% dilution) Series D @ $3B post-money (5% dilution) Series E @ $5B post-money (5% dilution) Exit @ $9B CoolVC would have exited with $1.8B + spent $100M (profit $1.7B) CheapVC would have exited with $900M + spent $50M (profit $850M) In other words, for an additional $2.5M in the Series A, CoolVC bought an option that would ultimately make $850M more in real dollars than CheapVC. In the VC world where 1 needle in the haystack makes or breaks your fund, it's an inexpensive option. At Series A, there should still be at least 50X potential upside. Why do most VC funds target 15-20% ownership? Probably that's probably the most they should get to balance founder ownership through further dilutive rounds. If you look at my above example, remember that founders will probably own less than 36% of the company (they also will get diluted by employee incentive plans).
  - gtzi 8y ago
    That's a fantastic explainer, thank you. In general, VC is by nature a game of ownership.
graycat 8y ago
The guide is simplistic and wildly overly optimistic -- a founder raising a Series A could not expect such fast progress, e.g., weeks. Much more realistic and prudent are the common advice and reports of reality that fund raising is difficult and challenging, a full time job, with effort so large it is a risk to the startup, contacting hundreds of VCs, straining to get warm introductions, taking dozens, maybe 100+, of in person meetings, for just one check, much less several, and months of time. The firm is asking way too much in time, effort, and expenses from the founder, e.g., flying to meetings with VCs. A founder would need a significant source of funds just to apply as described. There is the pitch deck with more advice that is challenging but obscure. Bluntly, there are NO good guidelines, many guidelines that vary wildly and no good guidelines, for what should be in a pitch deck. As a result, if the VCs need something other than just a good version, well organized, with the information clear, the spelling correct, of a business document, then they are looking for something founders have no way to supply. Many VCs seem to want and expect to be swept off their feet by some block buster summer popcorn movie, but any such production is way too expensive in time, money, and effort for a Series A and close to irrelevant for serious business and financial work. The firm is basically asking that the founder have a going business, at least traction and, to be realistic, likely earnings. Given the earnings, there is considerable question if the founder needs or should accept an equity check. E.g., in the past, a Web site startup needed big bucks for Sun servers, etc. No more: $2000 in parts will build a very powerful server and the cloud can supply a lot of pay as you go server computing right away. Given the traction of the startup, the firm thinks WAY to much of the importance of their check. The OP has the simplistic notion that the VC check will be the crucial enabler for future rapid growth; that view is in strong conflict with how successful businesses commonly grow. Net, the firm, for the whole process, is asking WAY too much and giving and doing WAY too little. Heavily that view of a Series A is from a dream version of the VC industry from 10+ years ago. That part of VC is gone with the wind. There is still lots of opportunity to make money in information technology startups, but ideas as simple and profitable as, e.g., Hotmail, are long gone. IMHO, computer science and VC funded startups are out of sufficiently good new ideas, out of gas, at the end of the road. For computer science, programming language syntax, parsing, compiling, linking, fundamental algorithms, database, TCP/IP, etc. are rock solidly done work, but computer science doesn't know what to do next. Similarly for VC -- projects as simple as Hotmail are done. There is more to do and very much worth doing, but computer science and the VCs need to find some new directions. Again, once again, over again, yet again, one more time, we find that VCs who desperately need very rare and very exceptional projects are proceeding with simplistic attitudes no more serious than a family shopping for a standard SUV. There is a lot of very serious work in our economy in research, engineering, law, medicine, national security, and parts of finance, but Sand Hill Road and the OP are not nearly serious enough. In the end, instead of the OP, a founder of a rapidly growing startup should consider the common advice that they should just wait until a VC notices the startup and contacts the founder. In the meanwhile, the founder should just keep working on the business.

107 points by gtzi 8y ago

"(investors aim at an ownership percentage and are willing to pay what will get them there)" What is the reason for this?

PanosJee 8y ago
Calculations that help them understand their possible returns on a company & fund level
jasode 8y ago
I think that paragraph is somewhat confusing for the intended audience. Anyways, VCs at series A want to buy enough equity percentage (e.g. 15% to 25% ownership) to make their exit numbers work. Investing a smaller amount to only get 5% of a company is not a "meaningful percentage" or "meaningful stake". (In contrast, YC does buy a smaller 7% equity but their $150k isn't considered "Series A".) To me, talking about investment scenarios in terms of "valuation" always seemed to make things more difficult to understand. The following math is equivalent but I think the explicit percentages layout is easier to grasp in a few seconds: Mark Z is considering 2 offers of investments for his young Facebook startup in 2005: Don Graham offers $6 million at a $60 million post money valuation. Accel Partners offers $12.7 million at a $80 million post money valuation -- or -- Don Graham offers $6 million for 10% of the company Accel Partners offers $12.7 million for 15.7% of the company
- dustingetz 8y ago
  Yes that is what they say ("make exit numbers work") but the math is elastic here so, that explanation does not check out, or at least something is missing.
brandnewlow 8y ago
When investors raise their funds, they pitch a specific model to their LPs. Example: "We're going to invest in a basket of startups whose aggregate value will be $X billion in 5 years and we will own Y% of those companies at that time." If they can't hit that Y number, they are not doing what they said they'd do.
jm20 8y ago
Most lead investors at the series A level look to take a board seat, and spend a lot more time per-company than at the seed round. There's a finite amount of time in an investor's day, and somewhere around 20% ownership of a company is, for whatever reason, considered the magic number where it's worth it to spend that much time with them (through assistance, board meetings, etc).
martinshen 8y ago
I believe investors aim at ownership percentages at Series A mainly for pro-rata. Lead Series A investors usually get pro-rata rights. Generally, the wisdom in startup investment is to double down on your winners and you typically can only do so if you have pro-rata rights. In other words, if the startup does super well, that VC will likely invest 10x more in real dollar terms to upkeep their pro-rata. Take 2 pretend funds: CoolVC has a 20% target ownership and CheapVC has a 10% target ownership. They do their pro rata every round. Rocketship Corp. will have the following rounds (super simplified): Series A @ $25M post-money Series B @ $100M post-money (15% dilution) Series C @ $600M post-money (10% dilution) Series D @ $3B post-money (5% dilution) Series E @ $5B post-money (5% dilution) Exit @ $9B CoolVC would have exited with $1.8B + spent $100M (profit $1.7B) CheapVC would have exited with $900M + spent $50M (profit $850M) In other words, for an additional $2.5M in the Series A, CoolVC bought an option that would ultimately make $850M more in real dollars than CheapVC. In the VC world where 1 needle in the haystack makes or breaks your fund, it's an inexpensive option. At Series A, there should still be at least 50X potential upside. Why do most VC funds target 15-20% ownership? Probably that's probably the most they should get to balance founder ownership through further dilutive rounds. If you look at my above example, remember that founders will probably own less than 36% of the company (they also will get diluted by employee incentive plans).
- gtzi 8y ago
  That's a fantastic explainer, thank you. In general, VC is by nature a game of ownership.

graycat 8y ago

The guide is simplistic and wildly overly optimistic -- a founder raising a Series A could not expect such fast progress, e.g., weeks. Much more realistic and prudent are the common advice and reports of reality that fund raising is difficult and challenging, a full time job, with effort so large it is a risk to the startup, contacting hundreds of VCs, straining to get warm introductions, taking dozens, maybe 100+, of in person meetings, for just one check, much less several, and months of time. The firm is asking way too much in time, effort, and expenses from the founder, e.g., flying to meetings with VCs. A founder would need a significant source of funds just to apply as described. There is the pitch deck with more advice that is challenging but obscure. Bluntly, there are NO good guidelines, many guidelines that vary wildly and no good guidelines, for what should be in a pitch deck. As a result, if the VCs need something other than just a good version, well organized, with the information clear, the spelling correct, of a business document, then they are looking for something founders have no way to supply. Many VCs seem to want and expect to be swept off their feet by some block buster summer popcorn movie, but any such production is way too expensive in time, money, and effort for a Series A and close to irrelevant for serious business and financial work. The firm is basically asking that the founder have a going business, at least traction and, to be realistic, likely earnings. Given the earnings, there is considerable question if the founder needs or should accept an equity check. E.g., in the past, a Web site startup needed big bucks for Sun servers, etc. No more: $2000 in parts will build a very powerful server and the cloud can supply a lot of pay as you go server computing right away. Given the traction of the startup, the firm thinks WAY to much of the importance of their check. The OP has the simplistic notion that the VC check will be the crucial enabler for future rapid growth; that view is in strong conflict with how successful businesses commonly grow. Net, the firm, for the whole process, is asking WAY too much and giving and doing WAY too little. Heavily that view of a Series A is from a dream version of the VC industry from 10+ years ago. That part of VC is gone with the wind. There is still lots of opportunity to make money in information technology startups, but ideas as simple and profitable as, e.g., Hotmail, are long gone. IMHO, computer science and VC funded startups are out of sufficiently good new ideas, out of gas, at the end of the road. For computer science, programming language syntax, parsing, compiling, linking, fundamental algorithms, database, TCP/IP, etc. are rock solidly done work, but computer science doesn't know what to do next. Similarly for VC -- projects as simple as Hotmail are done. There is more to do and very much worth doing, but computer science and the VCs need to find some new directions. Again, once again, over again, yet again, one more time, we find that VCs who desperately need very rare and very exceptional projects are proceeding with simplistic attitudes no more serious than a family shopping for a standard SUV. There is a lot of very serious work in our economy in research, engineering, law, medicine, national security, and parts of finance, but Sand Hill Road and the OP are not nearly serious enough. In the end, instead of the OP, a founder of a rapidly growing startup should consider the common advice that they should just wait until a VC notices the startup and contacts the founder. In the meanwhile, the founder should just keep working on the business.