SUMMARY
A seed fundraise is NOT an indicator of how a series A fundraise would be, both in ease of raising and timelines
Seed is about the team and a compelling pitch, however, series A requires proof points along several dimensions, which take time to understand and verify
It is advisable to plan for a duration of six months for a successful series A fundraise even if the startup is firing on all cylinders
Entrepreneurs who raised seed rounds in a flash can be justifiably puzzled when their series A fundraise becomes a long haul. Seed stage fundraises can be quick, with every conversation resulting in an investor keen to follow through. Along with helpful friends, colleagues and angel investors willing to participate, it seems like there is no dearth of capital. In fact, founders might even have to turn down capital at the seed stage to keep the raise and associated dilution contained.
After raising seed and getting heads-down into execution for the next nine to twelve months, entrepreneurs gear up to raise the next round, series A. They are high on confidence after hitting most of their projected milestones. With more validation of their idea, they look forward to a breezy round, a repeat of the seed experience.
It is a huge surprise when this round turns out to be dramatically different. A lot more questions, a number of ‘let me get back to you in a few weeks’ responses and a process that suddenly appears to take months versus just a few weeks of fundraising at Seed.
Far From Being An Exception, This Experience Is More The Norm. Why?
For this, we must understand the vastly different dynamics of seed and series A fundraises.
During seed, investors focus on the idea and the team. A strong team with a problem statement and story(pitch) told in a compelling fashion will attract the investors’ attention. The journey is ahead. The product, when it exists, is at v0.5, with most users being friends and close connections. In addition, the founders often have early commitments from friends and family, so the round is already in motion by the time conversations with venture investors begin.
From a venture investor’s viewpoint, the startup represents a risky bet, but one where there could be a tremendous upside. This is largely a qualitative assessment of the opportunity, as there is little data available. Different investors might end up having vastly different estimates of the potential upside. Each investor might have a different future trajectory projected for the idea, based on widely different assessments of the risks surrounding the venture.
We have all heard of so many storied startups getting rejected by 30-40 investors before they got funded (eBay, AirBnb, Mixpanel to name a few) and this is the reason why. There is little information to go on, and people have vastly different points of view in the absence of data. As the figure below illustrates, this results in a wide range of possible outcomes.
When it comes time for Series A, however, there is data available that demonstrates how the initial customer adoption, business model, growth rate, engagement, and retention are coming along. While there are still significant uncertainties in the business, the initial set of assumptions can now be validated.
There would also be instances where customer onboarding is taking longer than expected. TAM (Total Addressable Market) concerns will typically surface as it becomes clear which customer segments will, and which will not adopt the product. Founders will need to more credibly answer questions on differentiation and the competitive landscape.
More data and validation is a double-edged sword. While data demonstrates proof points for the product working as intended, there could also be evidence that certain big outcome scenarios are now unlikely.
The trajectory of the company can be more reliably plotted and in many cases, the top end of the spectrum, the massive upside scenario, might not look likely anymore. This could lead to certain investors not investing or others taking longer to conduct diligence.
All of this translates into a much longer and somewhat unpredictable timeline for completing the fundraise for series A. It helps to plan for a six-month fundraise, to leave enough time to fine-tune the pitch, establish more validation and approach a large enough set of investors.
This will seem outrageous to founders who might have wrapped up their seed in a few weeks, but understanding the key differences can help them be better prepared and reduce disappointments.
Summary
A seed fundraise is NOT an indicator of how a series A fundraise would be, both in ease of raising and timelines. While more data means more validation, it also means certain upside scenarios that looked compelling at seed look remote at series A.
Seed is about the team and a compelling pitch, however, series A requires proof points along several dimensions (customer acquisition, engagement, business model and more), which take time to understand and verify.
It is advisable to plan for a duration of six months for a successful series A fundraise even if the startup is firing on all cylinders.
