Seed Surge = Series-A Crunch?

Neil HartleyValue Creation JourneyLeave a Comment

investment

It’s never been easier to raise seed investment. Recent years have seen a four-fold increase in the number of seed investments. Unfortunately, the number of Series-A investments have been pretty flat over the same period and, in some regions, significantly down since 2014.

As a tech B2B founder looking to make your first Sales hire, should your glass be half-full (easier seed money) or half-empty (more competition for Series-A when the time comes)?

Even before the seed surge, less than 1 in 5 seed investments were making it to Series-A. That ratio may now have fallen to 1 in 20 (given a four-fold increase in seed investments). Perhaps it’s a temporary blip, but even 1 in 5 is not great.

So why do so many fail to make it?

Not every company tries for a Series-A round following seed investment, of course, and some of those may have seen slingshot growth from the seed investment alone, but the vast majority fail to produce a compelling case for Series-A and either fail trying or fail to try.

A failure to execute is likely the major cause and two of the major execution failures are: 1) the inability to accurately specify the right target market, and 2) successive failures in hiring the first salesperson.

Even if you’re looking to bootstrap all the way and grow without external investment, your success as a growing business is going to be totally dependent on getting that first Sales hire right. This is the domain of The Right Five – ensuring you hire the right Pathfinder salesperson.

Even if you execute as a business there are many pitfalls associated with the investment process, some of which can result in your ‘executing’ business to stumble and fail. The rest of this post will focus on those investment pitfalls all of which come from the school of hard knocks.

The Tipping Point

Even if your business is cash flow positive going into a cap raise process, that can quickly change as you increasingly become a slave to the process and inevitably take your eye off revenue generation. There will be a tipping point where you can stop the raise if it becomes too difficult (i.e. less likely to be successful) and return to business execution, but beyond which you will need to be successful with the cap raise to save the business.

Being able to identify this point is critical. That means keeping an eagle-eye on cash flow, revenue projections etc., but also on industry/world events. If a financial crash is looming, be aware of it and act quickly.

Investment Amount

The amount you’re raising may seem like a strange ‘pitfall’ but raising too little and going to the capital-raising well more than you need to takes an entrepreneur’s time (away from the business) and adds risk. Raising money with a cliff edge approaching is no fun and leaves you in a weak negotiating position (whether your potential investor knows it or not).

Business Valuation

The valuation you’re seeking for each round of funding.

Valuation can be linked to the amount you’re trying to raise. For example, which is best: a $1M raise at a $7M valuation or a $2M raise at a $2M valuation?

If this is an interim raise on the back of an initial angel/seed investment then so long as the valuation of that initial round was under $2M there shouldn’t be a problem. should there? Is the $1M enough or are you going to have to raise again uncomfortably soon? If so, the larger amount at the lower valuation might be the prudent option.

More of an issue is likely to be the valuation in the round after this one. How did you justify the $7M valuation? If the market outlook is worsening, you might struggle to justify the $7M valuation and potential new investors might only be willing to invest at a lower valuation (than the $7M). Not only will that seriously disappoint existing investors, but even your newest potential investor is going to look at see-sawing valuations negatively.

Alignment 

Are you aligned with existing investors/co-founders? You’d be surprised how many co-founders never have a conversation about equity/valuation/exit goals. Not being in agreement up front can cause real issues at key moments during the life of that business.

That’s fairly obvious but what about your investors? If you have an investor on board who raises money externally for their own investment vehicles, then you need to be aware of when they’re active in their own fund raises. Particularly if that overlaps your own cap raise.

For example, if you have an offer of $1M at a $7M valuation on the table along with another for more money at a lower valuation and your investor is pushing hard for you to accept the higher valuation, their own fund raising may be the reason. Clearly they’ll want to show maximum increases in the value of their portfolio and this is not necessarily aligned with your own needs.

These are just a few of the pitfalls you will need to be aware of and avoid during your own cap raise. Without execution none of these will come to bear. Great execution leads to a glass half-full. Please read our post on identifying your target market and, remember, your Pathfinder Sales hire starts with The Right Five.

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