Let’s start off by dispelling a myth about fundraising that leads to lots of heart break - “founders should be completely heads down until they’re ready to raise an A”. Almost all founders - with the exception of a small portion of those running the hottest companies - need to prepare in advance of their raise to maximize their chances of success.
In our last post, we discussed what it means to be ready to raise a Series A - from both the business’ and the investors’ points of view. Over the next three chapters, we’ll get more specific about how to tangibly measure your readiness and do preparation work ahead of your fundraise. We’ll focus on 3 themes:
metrics
story
relationships
Let’s talk about metrics first.
Metrics make your story believable
As we’ve said here, there’s no specific set of metrics that automatically lead to a Series A. Instead, investors make offers when they believe you're on track to building a massive company. This belief is primarily emotional, just as it is during the seed stage. Metrics support this belief by making your story credible.
In order for you to be able to use those metrics, some things need to be true. First, if you don't have a firm grasp on your metrics, you're not ready for fundraising. If you don’t know your metrics, investors will believe that you don’t understand your business. If you don’t understand your business, they will assume you won’t be able to figure out product-market fit or how to scale.
The first thing you need to do is to identify the key metric for your specific business. If you did this at seed, great. However, the key metric often changes as your business matures, so make sure you know the right answer. This metric is your north star. It guides all your other decisions.
Next, collect data consistently so that your key metric forms a trend over time which you, and investors, can use to evaluate the narrative you’ve built around your business. The most compelling story for you to tell is that your business has hit an inflection point and that you control the levers that produce predictable growth. This is what justifies raising money to accelerate growth.
Again, it’s helpful to conceptualize the Series A as falling between a Seed and a Series B. Your business is still evaluated on promise like in the Seed, rather than primarily metrics, but Series A investors use data and trends to validate that promise.
Key risks to your metrics narrative
If the following risks apply to your business, proceed with caution. You may not be ready to raise a Series A, or there is extra work to do around your metrics narrative.
Insufficient data: Your business launched two months ago, and early numbers seem promising. This kind of fundraising is based on potential, which is suitable for a seed round (or even a bridge) but not for Series A. Two months of data isn't enough to establish a trend.
Inconsistent data: Your average growth rate is high, but the underlying numbers display alternating months of negative, flat, and positive growth. Six months of 25% growth appears as a trend, while alternating months of shrinking and growing looks like a fluke, even if it averages out to 25% monthly growth over six months. If your numbers are inconsistent, you should have a solid explanation, such as seasonal fluctuations or specific go to market experiments that are producing iterative improvements in your machine.
Excessive poor historical data: Your company has been around for years or has already raised a significant amount of money. During that time, growth has remained mostly flat. Only recently have things begun to take off. What founders often don't realize is that it's more challenging to convince investors to trust the more recent trend over a substantial, years-long body of data showing a different (and far less promising) trajectory. The burden of proof is higher in this case.
Knowing your numbers
Getting comfortable with your metrics and knowing them in detail should happen well in advance of your fundraise. Here are some important principles:
Present numbers that accurately represent your business. Concealing or manipulating numbers can damage investor trust. For example, don’t show cumulative graphs or reporting gross merchandise value (GMV) as revenue.
Be familiar with your absolute numbers and their growth across monthly, quarterly, and annual timelines (where applicable).
Understand the calculation method for every reported number and the supporting data. Be prepared to explain assumptions that you made during calculations and, ideally, know how the calculation would change if you adjusted or removed that assumption (e.g., if you defined a "user" as someone who logs on once a month, know the answer if you defined a "user" as someone who logs on once a day).
Know these numbers by heart. If you don't know the answer to a question about your numbers and can't quickly access the information, say, "I'm not sure about that one; I'll get back to you later today." This response is better than making up an incorrect answer.
Standards and benchmarks
Previously at YC, we collected data and created benchmarks across categories in an attempt to give founders more certainty in planning and goal setting. You may have noticed we’re not doing that here. That’s because we’ve learned that hitting a benchmark does not determine fundraising readiness or success for most startups. The numbers are an artifact of fundraising rather than a cause.
However, there are some standards that investors use to evaluate your business. Here are some example metrics that may be relevant to your business:
SaaS: Growth rate, retention, NDR, cash efficiency, ACV
Enterprise: Sales motion, customer type, ACV, pipeline
Consumer: Growth rate, CAC/LTV, retention, usage
Marketplace: GMV, repeat rates, rake, seller retention
Hardtech: Technical milestones, subject matter experts, net working capital as % of change sales