What does an ideal startup ready to raise Series A look like?
• SaaS companies should aim for an annual recurring revenue (ARR) of $0.5-2.5 million and a Year over Year (YoY) ARR growth of 2-3X when seeking Series A funding
• Strong product vision, capable founders, and high-performing tech team are necessary for success
• Pre-money valuation for SaaS companies is usually $25-75 million, and they typically close a round of $6-18 million
• Tech team must perform well and provide evidence for why the business will thrive
• Founders and team must understand critical drivers and what it takes to succeed in the industry
• Product market fit (high retention, low churn, high lifetime value, high net promoter score) is crucial
• Clear understanding of total addressable market and compelling reason for solving the problem now is important
• Repeatable, effective sales process is necessary
Things to keep in mind before raising Series A
Ensure that you have the right economics
Series A fundraising is a serious process and generally involves millions of dollars for software companies. At this stage, the VCs are looking for companies with the potential to 10X-50X their initial investment.
Now, such numbers look too flashy, but if you consider the lifecycle of a startup from Series A to IPO, there is a big chance for it to happen. If your company has the potential to reach 100s of millions of dollars in ARR, you'll be fine raising money. Know about your pipeline, sales processes, conversion rates, and how long it takes to close sales, as VCs expect you to know all these metrics.
At the same time, ensure that you have the right unit economics, promising business model and strategy, product-market fit, customer acquisition strategy and channels in place, a broad vision, quality and world-class team, and processes to support the growth trajectory of your business.
Keep 9 to 12 months of the timeframe in hand, as raising Series A is time-consuming.
Having a buffer of 9 to 12 months in hand and a runway of 18 to 24 months before the fundraising process gives you the leverage and the ability to choose the best deal for your business. Also, nobody likes to onboard a sinking ship and underestimating the time needed would eventually lead to panic.
In such a case you’ll end up adjusting your fundraising plan and opt for bridge rounds to sustain the business. It is important for you to have the right financial model.
Leverage your network till it dries
Series A financing is more complex than the seed round and involves a significant amount. In such a situation, the question is, "If you're not on your investor’s radar months before the funding round starts, how can you build relationships and demand?"
You must reach out to your connections and build genuine relationships with those who could invest in your business. It is crucial to leverage your network and cultivate authentic relationships to make booking meetings with potential investors more straightforward. Contact your extended network and get them to contact their contacts. These second-degree networks produce powerful and favourable results.
An angel investor generally doesn’t invest in a startup that they have not been following for at least 3 to 6 months, so when you reach out to these potential investors coldly, there is a big chance you are not going to get the expected results. Hence, you need to build interest to make sure that when your round opens, there is a high demand. So, in a general case, you would be reaching out to these potential investors through cold emails when you’ve already exhausted your personal network. So, at this time you need to have the right strategy and right information about the angel, and be in their radar for a good time so that you earn the right to send more information, when the timing is right.
Raise more than your projected expense
It would be best to raise around 15-20% more than you initially thought your expenses could be. You must always play safer and have the right plans to encounter any issue that could arise if your business operations don't go as forecasted. After Series A, the fundraising process would become more complex and time-consuming, and the investors would perform several due diligence before pouring tens of millions of dollars into your series B or the bridge rounds.
Having extra runway never hurts; hence, you must connect with as many investors as possible and book meetings with them to raise more than your projected expenses.
How should you plan your upcoming runway?
Add sufficient runway for your venture.
Knowing how much time you have added to your business's sustenance is a crucial metric you should be aware of at any given moment.
Now, it is pretty simple to know this number, as you need to add the cash you have in the bank and the monthly revenue you get. Now, subtract this number from the amount you burn every month.
How To Calculate Gross Burn Rate
Total monthly cash expenditures make up the gross burn rate. For instance, if you start the year with $100,000 in your bank account and conclude it with $25,000, your gross burn rate would be $6,250.
Formula to calculate gross burn rate: (Original Cash Balance - Remaining Balance)/12 months
How To Calculate Net Burn Rate?
The net burn rate represents the rate at which you are losing money. It's the measure of the difference between cash out and cash in. Hence, the loss-making companies would have a positive burn rate, while the profitable companies would have a negative burn rate.
This is equal to your net income on the profit and loss statement and is computed similarly for each month, where you add all monthly expenses and deduct all cash income. This is done every month because it is essential to account for the unpredictability in revenue, meaning that your burn rate will increase if your income is lower than it was the prior month.
Making Startup Runway Calculations
It's simple to figure out your startup runway or how long until the need to raise again. Divide your starting cash balance (in this case, $100,000) by your monthly net burn rate.
BOTTOM LINE
Fundraising is tough and hence most funding gets undersubscribed because they fail to create demand. They’ve failed in communicating the value of their startup with the right investors. You need at least 6 months to do it right. Foundraisr has helped several startups so far to get investor meetings and establish strong relationships between the founder and the VCs. Our process involves building relationships and creating demand with investors to help funding rounds get fully subscribed before they even open.
Book a call today to know how our proven fundraising framework could help you reach the right investors.
