Successfully raising your first growth round — how to bridge the gap from Series A to Series B and beyond
Few things are more readily apparent to a venture capital investor than the simple fact that fundraising is hard — there’s no playbook for chance meetings with future investors, prescription for the right balance of time spent between building your business and positioning for an upcoming raise, or magic formula for an ultimately successful process. Further, each round of funding comes with its own unique set of challenges (e.g., finding an investor willing to take a chance on your team before there’s even a ‘what’ behind the ‘why’ in a seed round, articulating why you are on the precipice of product market fit with only a handful of early adopters at the Series A stage, etc.), typically discovered only after the initial series of pitch meetings with target investors.
While raising venture capital can be filled with uncertainty at every step of the process, positioning for a growth round is particularly challenging for fledgling startups. Despite record levels of dry powder earmarked for venture capital deals, early stage financings of $10M and below have continued to dominate the funding landscape:
US-Based Venture Capital Deals Closed (#)
Given the large gap that exists between early and growth stage funding availability, companies that understand what growth stage investors are looking for in a pitch deck are at a material advantage over those learning it as they go. In a post-COVID world, without the chemistry that often accompanies in-person meetings, your pitch deck becomes even more important. So, what do growth-stage investors want to see from you? Here is a list of a few key elements to be sure to include in your pitch when raising your first round of growth capital:
1. Metrics Dashboard
Metrics matter. While this may seem obvious, the number one mistake we see early-stage startups making when going out to fundraise after their Series A is not including the core metrics investors look for when evaluating a growth-stage business. Where early-stage investors may only be looking to understand the team and the vision, the further you move down the fundraising spectrum, the more metrics take precedence over some of these ‘softer’ aspects of your business and narrative. Growth-stage venture investors are typically looking for clear signs of product-market fit, signs which can often only be evidenced through historical data. Perhaps consider including an easy-to-read dashboard like the following put together for an imaginary horizontal enterprise SaaS company:
In addition to the above dashboard (select formulas included below), some other metrics helpful in demonstrating product-market fit include:
Magic Number = Incremental Recurring Revenue ÷ Previous Period’s Sales & Marketing Expense
Quick Ratio = (New MRR + Expansion MRR) ÷ (Churned MRR + Contraction MRR)
Rule of 40 = Recurring Revenue Growth + EBITDA Margin
Payback Period = Customer Acquisition Cost ÷ (Avg. Rev. per Account * % Gross Margin)
Capital Efficiency = Recurring Revenue Generated ÷ Associated Capital Outflow
Engagement (e.g., DAUs / MAUs, registered vs. active users, time spent, NPS, etc.)
Even if you are going out to raise your Series B round before you are able to show meaningful progress toward some of these benchmarks, don’t be afraid to list them anyway! As venture investors, we are in the business of taking large bets amidst immense uncertainty and often, a team’s mindset matters even more than what they’ve done to-date. Put your best foot forward by weaving metrics into your day-to-day operations as early as possible.
2. Customer-Level Data by Cohort
While some may prefer to reserve this level of detail for investors who have demonstrated continued, genuine interest in a business vs. sharing sight-unseen with a new connection, we’re believers that the insights resulting from cohorts can be some of the most powerful indicators of product-market fit a startup has at its disposal. A comprehensive cohort analysis illustrates material sustained traction with each individual customer set, but, perhaps more importantly, can also serve as an early warning sign for issues with customer satisfaction, retention, acquisition costs, or even an entire business model long before they bubble to the surface. Even if you choose not to include any cohort insights in your initial deck, be prepared to be asked about them and ensure every member of your team is thinking about their implications well before it’s time to fundraise.
While there are many metrics that can be parsed through using a cohort analysis, investors are typically most interested, at least initially, in stats such as recurring revenue and associated total customers over time. Ironically, an investor’s favorite cohort data to receive is not in the form of a cohort at all, but instead as a raw dataset they can manipulate. Moving beyond the pitch stage and into formal due diligence, investors will be looking to understand the journey of each of your customers individually, seeking answers to some of the following key questions in data form:
· When did each customer sign up?
· What was their initial MRR?
· What patterns can be gleaned on a cohort basis based on customer start dates?
In other words, investors want to see that the numbers tell the same story as the narrative in your pitch deck and cohorts are an essential part of this equation.
3. Long-Term Projections
Growth-stage investing sits in an interesting position, relative to early-stage venture capital at one end of the spectrum and private equity at the other. Growth investors look for young companies with both material runway for growth and meaningful historical traction, and they consequently rely heavily on long-term projection models when building their internal view on the viability of an investment. While investors will ultimately compose their own assumptions on how a company’s historical trends may translate into future growth once they move into deeper due diligence, giving them an early glimpse into how your team is thinking about the long-term financial trajectory of the business during a pitch meeting often results in a more fruitful conversation from the start and can aid in getting to a yes or a no decision sooner. This becomes especially true in focused areas of investment such as enterprise SaaS, where many investors have implicit thresholds around benchmarks such as time to $100M in ARR.
4. Internal View on Total Addressable and Serviceable Market Size
While every investor will ultimately form their own internal view on market size, rich contextual insight is often gleaned from seeing how the team is thinking about addressing the market. In other words, investors want to know how deeply you’ve thought about your potential customer. Are they isolated to a specific geography or sector, or do they span multiple categories? This brings us to another common pitfall we see founders falling into when they go out to raise their first growth round: only thinking about total addressable market as opposed to going one step further and presenting a view on the serviceable market as well. If the difference between the two is unclear, we’ve put together a high-level overview to reference below:
While top-down market sizing estimates from research reports provide a great directional view on the market, it is always better to build your own estimate using a bottom-up approach (i.e., primary market research on specific customer counts and pre-determined pricing expectations).
Raising your first round of growth capital is all about taking every component of your early-stage pitch a couple key steps further. Whereas your initial pitch may revolve around what you think, your growth story centers around what you know. By the time you reach this phase, there are real metrics to parse through, a set of established customers and associated purchasing behaviors to analyze, and an applicable market that is beginning to reveal itself. Going into the pitch room (or, in today’s world, pitch Zoom) will feel less overwhelming, and your potential investors will be much more engaged, when you provide tangible details that bring your growth story to life.