Mistakes to Avoid When Raising Series A VC funding

Posted in VC
27/01/2021 Ian Merricks

As Chair of The Accelerator Network, and a Partner at White Horse Capital, I’ve had the pleasure of working with more than 1,000 entrepreneurs over the last decade. Hundreds of these have gone on to successfully raise VC backing, often with our support, as we prepare the companies, find and match the investor, help negotiate the terms and celebrate successful deal completing. Along the way, I’ve seen common mistakes, so I’m sharing 4 of the most common mistakes and misconceptions here to help you avoid them. Not everyone you speak to will agree, and its true there are lots of different ways to raise funding, and from different sources. However, I am interested in the most efficient connection to strategic and value adding capital, and having helped negotiate 50 Series A term sheets, I stand by these tips. 

Not the same as seed (see Duncan’s video) – Proof points

Raising Series A is different to your past experiences of raising investment. As a first institutional round, there are numerous new challenges to navigate. Firstly, you will be working with an investor team, not an individual. The team are not the investor, they represent the investors. Which means they are governed by the terms they have offered to the Limited Partners (LPs) in their funds. Also the proof points required for VCs to get comfortable with a deal are much, much higher than an angel investor would expect. A business plan filled with hope, Founder beliefs and unjustifiable optimism will quickly be discredited by VC team.

Document readiness = speed

I battle with this every week. Busy, driven entrepreneurs who have got their business to £1m of revenue, believe in themselves – as they should. This can lead to a view that if they meet a VC they can ‘talk them round’ – they have a compelling story and intricate /perfect knowledge of their business, market, margins and plans – plus it worked with the seed round. The reality is that whilst many VCs will make time to meet with a Founder and hear about their journey, a serious investment is best attracted with a full suite of documents; a written business plan (full of proof points), detailed pitch decks (2 of, and themed to match different types of investors), sensitised financial forecasts and a clean data room. There is not a shortcut for this work, although we have designed a 24 hour process (delivered over a few weeks) that achieves all of this, via The ScaleUp Accelerator’s IP.

Investor proposition

You will bring the timeline of the successful deal forward by knowing 4 key numbers that collectively comprise your investor proposition. 

  • How much are you raising – note, this is not how much would you like, or what could you spend, its what is the optimum amount, net of fees, to fund the growth plan in the next 18 months to maximise the growth in value for the business within an agreed set of risk metrics. In addition, how does your ask relate to the market – what different VCs want to invest (and when, if tranched). 
  • Use of Funds – What will your funding be used for? Not only tactically (key hires, sales marketing, ongoing technical development) but also strategically – where will this get you to, what will it achieve, what proof points will you realise, how will it improve your valuation. 
  • What valuation – A hugely contentious topic. A quick tip, its not the number you thought of, and its not derived from an arbitrary 20% holding for the VCs. How you arrived at your valuation, how that relates to the last valuation, and the deal structure all interacts to create your valuation.
  • The predicted ROI – What will your VC funding deliver as a return on exit, and how this relates to the VCs promise to their LPs, and their stage in the funding cycle? Hopefully its obvious when I say it now, but this is why VCs invest. Too often I see entrepreneurs with a vague narrative around ROI – this will reduce your valuationif not investment prospects entirely.4. Warm (& targeted) intros – DIY = B/S!

Clearly each of these essential numbers would benefit from expert guidance, which we are happy to deliver.

Warm (& targeted) intros – DIY = B/S!

My biggest frustration is when I hear from bystanders that VCs don’t want or welcome warm introductions from properly prepared businesses; perhaps that it’s a sign of weakness for the entrepreneur, or that the VC is open to cold approaches. Some VC’s are open and it’s becoming increasingly popular to say so, but meeting lots of VCs is not your objective, raising growth capital from strategically useful investors with the least disruption to your business is. We know from our VC community that they value the extra diligence and preparedness that advised businesses represent plus we know this quality threshold bolsters valuations. Warm and targeted intros are absolutely the way to go.

If you want to spend time getting to know all the best VCs, come and work for us! If you want to raise funding from the best VCs as promptly as possible with the least distraction, let us work for you!!

Going forward, post Covid, my prediction is that VCs will continue to demand an ever-higher quality bar – the growth in startup support over the last few years has helped create many, many more businesses looking for cash, than represent truly scalable businesses. This quality will be sought around team, execution, revenue growth, controlled cost base and other standout factors. As such, the risk of making mistakes becomes even more damaging to your growth aspirations and the time taken to raise VC funding.

To ensure you are positioned correctly to strike a partnership with the optimum investor, and to avoid the above mistakes, through feedback from exited entrepreneurs, conversations with funded Founders and weekly input from leading VCs, check out The ScaleUp Accelerator (or for direct 1:1 support, White Horse Capital).

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