The first question founders ask about Series As is: “when are we ready to raise one?” Given how often they happen, you’d think there’d be an obvious answer, but that’s not the case. In fact, it is impossible to determine when a company is 100% ready to fundraise. Traditional advice falls short since there are so many exceptions to each rule as to render the rules useless.
For example, a common belief about Series A timing is that it’s determined by specific metrics. This is appealing for founders seeking certainty and definitive milestones to target.
Unfortunately, the idea that VCs filter primarily on metrics (most commonly, the urban legend of the $1M ARR threshold for SaaS Series As) is empirically false. There’s no such deterministic set of milestones (I’ve written more thoughts on this here).
Rather than view the question of timing from the perspective of the company, founders need to view it from the perspective of the investor. The best time for founders to kick off fundraising is when investor excitement is peaking.
It's useful to view a VC’s decision process along a horizontal axis, which corresponds to a company's progression from an idea to a functional, scaling business. The decision process and company progress are closely related because, at each stage, an investor is evaluating the company based on its achievements up to that point. The axis represents a spectrum anchored by Promise on one end and Metrics on the other, corresponding to the seed round and B round, respectively.
Seed rounds are raised primarily on founder quality - investors are trying to predict the likelihood that the founding team turns an idea into a company worth billions of dollars. By the Series B, founders need to have proven significant progress towards achieving that outcome. They’ll need to demonstrate that progress with in-depth metrics that indicate the business’ health and prove that the business can create massive leverage out of additional capital. Different businesses are held to different standards. Hard-tech or biotech companies have technical or regulatory milestones, while software companies are generally expected to show substantial revenue growth.
The Series A is so hard to predict because it’s evaluated on both promise (like a seed) and metrics (like a B).
What’s even more complicated is that VCs’ risk tolerance on this continuum is variable and depends on factors such as who the founder is, what the expectations are based on the amount of money already raised and spent, and how long the company has been around. For instance, a founder who sold her last company for $10B will be able to raise far more money on less progress than a fresh founder without an exceptionally compelling story. On the other hand, a founder running a company that is growing exponentially doesn’t necessarily need significant experience. Founders need to be honest with themselves about their strengths and weaknesses, and craft the right narrative around them to generate investor interest.
This is not the “crystal ball” answer that founders are hoping will tell them exactly when to fundraise. But it’s more accurate (and prudent) to think about fundraising timing as a function of two inflection points, from:
1) the business’ perspective that it’s ready for the next phase of growth
2) the investors’ perspective that the business is ready for their next injection of capital.
These are related, but it’s important to recognize the two as distinct signals that need to be validated in parallel. We call this intersection the “Decisive Moment.” Great founders choose to fundraise when both conditions are met and validated.
In later chapters, we'll break down how to pressure test your business based on your metrics and narrative, and then tactically measure investor sentiment to know if and when there is sufficient interest to start raising.