Series A rounds are crucial for high-growth startups looking to scale exponentially. Normally a Series A round occurs after a Seed/Pre-Seed round and in the UK it typically involves an investment of £1-£5 million for 8-25% of a company’s equity.
As a founder, raising capital is not the only goal for a Series A round. You are also looking for the right partners to support and guide you in your journey towards success. Selling equity in your company is like getting married in many ways. Just like in marriage, you want to find the right partner who shares your values, is supportive, and can help you grow. The same holds true for finding the right investors for your Series A round.
Partnering with the wrong investors can be detrimental to your company’s growth. If the investor has conflicting values or a different vision, it can create a divide in the company’s direction, leading to internal struggles and conflicts. Additionally, investors who are not aligned with your goals may pressure you to make short-term decisions that do not align with the company’s long-term vision.
Furthermore, the investor-founder relationship is a long-term commitment. Once you bring investors on board, they will be a part of your company for years to come. Therefore, it is essential to find investors who share your passion, vision, and values.
Three tips to find your perfect Series A investors
To find the investors that add most value to your Series A round, you need to target the venture capital firms provide not only capital, but also valuable strategic advice and industry connections.
Here are three practical tips on how to target the right VC firms for your Series A round, from both founders and venture capitalists on how to find the right investors for your Series A round:
- Know Your Business:
The first step in finding the right investors for your Series A round is to understand your business. According to Ali Rowghani, CEO of Continuity, “Before you start talking to investors, you need to know what you want to achieve with your business and what metrics you need to track to measure your progress.”
Knowing your business will help you target investors who have experience and expertise in your industry. If you need to scale rapidly to capture a market before competitors appear, or want to expand into the US market, some VCs have more experience than others doing these things.
- Seek Referrals:
Seeking referrals from existing investors and other founders in your network. According to Phil Libin, founder of All Turtles, “Referrals are the best way to find the right investors. You want to work with investors who understand your business and are aligned with your goals.”
Referrals can also lead to warm intros to potential investors, which are said to increase your chances of fundraising.
Asking for referrals can also help you find investors who are a better fit for your startup. Ensure that the people who you are asking for referrals have a good understanding of your business and its needs. This will help them refer potential investors who they know have experience and expertise in your industry and can provide the strategic guidance and support that you seek.
- Be Selective:
When it comes to fundraising, it’s essential to be selective. In a 2017 interview with Y Combinator, Musk explained that when Tesla was raising its Series A round, it received two term sheets: one from a well-known venture capital firm that offered a $100 million valuation, and another from a lesser-known firm that offered a $60 million valuation. Musk and his team ultimately chose to go with the higher valuation offer, as he valued the positive impact the higher valuation had on his personal equity dilution.
However, Musk later regretted his decision to accept this higher valuation, despite it being 66.7% higher than the offer he regrets not taking!
Musk explained that the higher valuation caused the company to lose focus on its product and led to a difficult period in the company’s history. In his words, “The VCs at that time were all trying to get us to hire a CEO. And we didn’t want to do that because we were like, ‘We’re the guys that know best.’ And then we’re like, ‘Oh, well, maybe we don’t know best.'”
Musk went on to say that he learned from this experience and that, in retrospect, he would have chosen the lower valuation offer. He emphasized the importance of focusing on the product and building a great company, rather than getting caught up in the hype of high valuations.
Six famous examples of startup founders that chose lower valuations
Just because I was curious, here are six famous examples of founders that chose to go with a lower valuation that what they were offered during the fundraising process:
In 2009, Airbnb was valued at $1.5 million. Despite receiving offers at a higher valuation, founders Brian Chesky and Joe Gebbia decided to accept an investment of $600,000 from Sequoia Capital at a $4 million valuation.
In 2010, Instagram founders Kevin Systrom and Mike Krieger decided to accept $500,000 from Baseline Ventures at a $5 million valuation, despite receiving offers at a higher valuation.
In 2014, Slack was offered funding at a $1 billion valuation, but founder Stewart Butterfield turned it down and instead accepted a $120 million investment at a $400 million valuation from Google Ventures and Andreessen Horowitz, as it allowed him to retain more equity.
In 2011, despite receiving offers at a higher valuation, founders Patrick and John Collison decided to accept $2 million from Sequoia Capital at a $20 million valuation.
In 2010, Uber was offered funding at a $6 million valuation, but founder Travis Kalanick turned it down and instead accepted a $1.25 million investment at a $4 million valuation from First Round Capital and Lowercase Capital.
Despite receiving offers at a higher valuation, in 2012 the founder Eric Yuan decided to accept $3 million from investors at a $25 million valuation.
In conclusion, finding the right investors for your Series A round is a critical step towards the growth and success of your startup. It is essential to target venture capital firms that provide not only capital, but also valuable strategic advice and industry connections. To do so, founders must:
- Understand their business and what they want to achieve.
- Seek referrals from existing investors and other founders in your network
- Be selective and consider all factors, including your valuation, when choosing investors.
Raising capital and finding the right partners can be challenging and time-consuming. Still, it is essential to start the search for Series A investors early and to remain patient and persistent in the process.
Remember, choosing the right investors is a long-term commitment and can have a significant impact on your startup’s success. By following these tips and advice from experienced founders and venture capitalists, you can increase your chances of finding the perfect Series A investors for your startup.