The Difference Between Raising Seed & Series A
I originally wrote this article for The ScaleUp Accelerator where I help companies get ready for scale and to close their Series A rounds.
2021 has the potential to be a great year for scaling UK companies. For the most part, we understand how businesses have been impacted by Covid-19, supporting 160 companies in 2020 across The Accelerator Network and our parent company White Horse Capital. There is obviously some Brexit uncertainty, but as ever, resourceful and determined entrepreneurs will find a way through.
Seed investments were impacted last year due to angels hunkering down and protecting their portfolios and cash. VCs also initially held back but are now focused on new deals again. If you are past the £40k MRR revenue mark with strong growth and expect to reach the magic £1m ARR number this year, then the following article could give you insight into the difference between raising Seed and Series A. Much of what is stated in this article comes from our experience of £350m+ of completed transactions over the last 10 years or so.
Raising Series A is not like a Seed round. Be prepared for it.
VCs are not like Angels
VCs are very different from angels. They are not investing their own money, therefore the controls around how they invest are far tighter. They are professional investors who have a reputation to protect and are therefore likely to need a lot more persuading than the average Seed investor.
You need to understand what a VC wants from a deal. For example, what metrics do they need to see? Do you have the team in place, or have you identified those A-players who will join you when you have the cash to employ them at nearer market rates? Ultimately, what do they need to see to be able to bring your deal to the investment committee?
A VC needs a vast amount of information required in your Series A investor proposition. This is significant when compared to Seed. And their investigation before you get to the investment committee is often amazing and cross-examination during Due Diligence is next level!
It takes a long time to gather, analyse and present proof point data from your own systems and 3rd parties. Do not underestimate this. You will need to carve out enough time to prepare your documentation. Delegate tasks that can be done by others (you should be planning to do this anyway).
VCs are looking to exit in 5 years, so your model needs to look 5 years out. They also need to be able to quickly see the effect of pulling different levers within the model and they don’t want to spend time manually creating multiple versions of your sheets, so make sure your assumption page automatically changes the outputs within your model.
Use a business plan as an enticing narrative to justify the story that your pitch deck and financial model tells. It doesn’t need to be ‘“War and Peace” but expect to write a couple of pages on each section, with multiple proof points throughout. Ensure you use credible reference points and add an appendix in order to not overwhelm the reader but to maintain the interest of the VC.
1-page teaser document
This is sometimes called an Executive Summary or Investment Memorandum. Like any marketing document, think about this from the perspective of the target reader – how can you gain interest from the first part and succinctly provide an enticing overview of your proposition? Your teaser document will be a high-level summary of the business plan and financial model.
Prepare 1 very visual version for presenting in around 20 minutes. As with every sales meeting you want to limit your talking time to ensure your VC has time to ask questions. Ideally, your investors will have been enticed by your 1-pager to have already reviewed your financial model and business plan, so have all the data they need before your first meeting. Sometimes investors want to look at a more detailed deck, therefore you will need to create a longer form second deck too.
Do not leave your data room to the last minute. And do not underestimate the amount of time required to prepare, collate and file all of the relevant information. A well-sorted data room provides VCs with some comfort that their prospective investment is well managed.
Continuing on from the data room, you need to make sure you can demonstrate sound corporate governance. Apart from the usual requirements of business management, you need to ensure your deal is as attractive as possible. For example, is your cap table tidy; do you have any debt or loans in the business; any skeletons that you need to clean up?
We have been working to scale UK tech companies for a decade. Much of that work includes Series A investment preparation, VC outreach and deal negotiation. If you’d like to learn more about how we add value to Series A deals then take a look at https://thescaleupaccelerator.com.