# Friday, 13 March 2015

Yesterday I was in a discussion on Twitter with Semil Shah and Marc Andreessen about the value of a pitch deck. Marc thinks that the pitch deck has to be well polished and Semil and I think that a bad pitch deck with an awesome presentation by a passionate founder is ok for a seed round. 

Screen Shot 2015 03 13 at 10 03 00 AM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

That was the critical differentiator:  the round. If you look at the conversation, Marc and I are in agreement on the need for a quality deck, we just disagree on the stage. This got me to thinking of the main difference between raising a Seed round and a Series A round.

As several Fresco Capital portfolio companies are currently raising a Series A or have just completed one, the difference between Seed and Series A is fresh on my mind (hence why I felt bold enough to challenge an icon like Marc yesterday..)

If you remember from my previous post, typically when you are raising a Seed round you don’t have your product-market fit figured out, nor do you have the exact facets of your business model ironed out. You typically figure this out during your Seed round and execute on your business model in a Series A.

Raising a Series A round is very different than raising a Seed round. Seed is about finding a business model, Series A is about executing that business model at scale. Marc is correct and you need polished deck for the Series A,  however, you also need to demonstrate two other important things in order to get funding: you need a repeatable business that scales. 

Repeatable Business

In order to demonstrate a repeatable business, you will have to show that you have customers, users, etc, coming back for more. You want to keep the customers you win engaged rather than churn them out.  Measuring engagement is not going to be the same for each business, but you need to figure out what it means for your business. Typically it has to with the Customer Lifetime Value and how many customers your business can support. 

If you are building a consumer app similar to Instagram for example, you have to demonstrate the engagement of the users you have posted XX photos per week. How many comments they leave, etc.  If you are building an e-commerse mobile app, it may be defined by the transactions performed each month, a game can measure how often they play and level up, or in a B2B service, how often certain tasks are performed. Even in the Seed stage, you should be able to determine this number, even if you have to do small tests and experiments to do so.

Scalable Business

Having a repeatable business is not good enough, you also need a scalable business. I’m not talking about the techie versions of scalability where your app and site perform the same under load as they do under normal conditions, but rather the business model. Typically this has to do with customer acquisition costs. Specifically, you need to work through this formula: CLV - CAC = $some really big number

Where CLV is your Customer Lifetime Value or the amount of profit each customer brings to your business over the course of their entire experience with you. This is difficult to calculate at an early stage (as you hope to have customers for 10+ years and you may only be in business for a year), but with enough cohort analysis and other data analysis, you should get a good feel for this number by now. 

CAC is the Cost of Customer Acquisition. This is how much it costs you to get a person through the funnel and convert to actually buy something. This number may be easy to calculate if you get 100% of your customers from marketing campaigns, take the total cost of the marketing campaign divided by the number of people who converted into customers. (For example if you spent $100 on AdWords and 4 customers converted, your CAC would be $25.)

Let’s look at how important this formula is:

CLV ($45) - CAC ($45.01) = -$.01

Here you are losing one cent on each customer and will eventually go out of business. Not good, not even the best deck can save you here.

CLV ($1) - CAC ($0.99) = $0.01

Here you are earning one cent on each customer and will eventually build a profitable business. The difference of just two cents can make or break your business! 

Now in reality, I’d like to see something like this:

CLV ($6) - CAC ($1) = $5

Meaning, for every $1 you put into your customer acquisition/marketing campaign, $5 comes out. Very scalable. If you are raising a Series A of $5m and in your deck you show this formula and say that $2m of the $5m is earmarked for customer acquisition, the investor knows that $10 should come out. Assuming that your formula is correct. (Actually as an investor, I would expect you to focus like a laser beam on the funnel optimization and get that CAC down while simultaneously increasing the CLV.)

As you move your business out of the seed stage and onto a Series A, make sure you make Marc happy and have an awesome deck. In addition, if you want his (or my) money,  demonstrate that you have a repeatable business that scales.

posted on Friday, 13 March 2015 17:39:20 (Eastern Standard Time, UTC-05:00)  #    Comments [0] Trackback
# Thursday, 05 March 2015

If you have ever seen me speak at an Accelerator or startup event, I usually refer back to my experiences raising capital for my past startups. I’ve had experience raising money in four distinct eras: the “dot com era” circa 1999, the post dot com crash circa 2002, the post Google IPO-pre-Lehman collapse era (2006-2008), and the more current (post-Lehman) environment. While many of the rules of fundraising are the same, the stages, amounts, and terms have drastically changed over the years. Living and investing in Silicon Valley, I have observed the new pattern of fundraising, broken down to four stages.

fundraising stages

The four stages are:

  • Acceerator Round/Initial Capital
  • Seed
  • Series A
  • Series n

 

While there are all kinds of startups out there from pure software to BioTech to hardware, I’ll use the example of a typical software startup in the example below. The rounds and rules hold true in board strokes for most startups, but the dollars and sources may very. 

Accelerator Round/Initial Capital/Friends and Family ~$100,000 USD

This is the round where you move from idea to prototype, possibly to a first version you let people play with. Lots of experimentation, MVPs, and customer discovery. You use this round to get a sense of a “product-market fit” but not necessarily a business model. Typically you have two or three founders working on sweat equity and some money borrowed from friends and family. This is the stage to go through an accelerator or have a single angel investor. The average size of this round is about $100,000 USD, excluding the value of the sweat equity. Once you have demonstrated the ability to execute and launch a functional prototype and can extrapolate the results, you are ready for a seed round. 

*Note that if you are a hardware startup, your Kickstarter campaign, would typically come into play here. 

Seed Round ~$1-1.5m USD

This is the round where you obtain “product-market fit” and find your business model. You develop and release your product and start to measure the results. Your customers may not pay you a lot at this point, but you have built an audience or customer base. This is the round where you bring on your first non-founder hire and move out of the garage, typically to a co-work space. The range of this round is between $1m to $1.5 USD structured as a convertible note. The typical scenario is that you have 3-4 investors, one lead at half the round at $750k and the other 3 investors in at $200k - $300k each. It is important to have a lead that is capable of investing in your next round, possibly leading that round as well. As general advice, beware of an AngelList syndicate as your lead during this round, a lot of the time that syndicate is only good for the amount of the syndicate in your seed round and not capable to lead the Series A. 

Series A ~$3-7m USD

This is the round where you execute on your business plan and scale. You have paying customers, you know where to find them, and you just need to accelerate the process of on-boarding them. Typically with a Series A, you don’t need the money as you can grow organically, however, you raise a Series A in order to grow faster. Typically you use a portion of the funds raised for customer acquisition as well as some new hires in both sales and marketing roles. The range of this round is typically between $3m-$8m USD with some if not all of your seed investors participating. Sometime about now you think about moving out of that co-work space and into your own office. 

Series N… $25m-$1b USD

After a Series A, typically the later rounds (Series B, C, n…) are for massive growth. I like to use the analogy for a Series B as “rocket fuel.” For example, you found your product market fit in your seed round, you developed and executed on your business plan in your A, and you have a repeatable business that scales. You’re making money and have a great team. You know where your customers are and how to get them to give you money. If you grow out of revenues, you are going to get to the target (say 30% market share or $150m in revenues), but it will take you a long time organically, say 3-5 years. This is the airplane taking off and going fast, but hovering above the tree line. With a Series B, it is like poring afterburner rocket fuel on to your airplane and the goal is to get to the target in 1-2 years, not 3-5. Later rounds continue this trend and are also used for acquisitions to speed up the process as well as provide some capital to enter foreign markets. 

 

While this is not the exact path that your startup will take, it is the “textbook" course a startup will take. Use this information as a guide and as with everything in this business, your milage may vary

posted on Thursday, 05 March 2015 17:54:17 (Eastern Standard Time, UTC-05:00)  #    Comments [0] Trackback