As the founder and CEO of the HR platform Namely, Matt Straz has experience raising a growth round of funding. The following is his advice, from his point of view, on the process.
While there are many thousands of people and firms that can provide money to get a startup going, far fewer entities, perhaps just a couple dozen depending on the business, can fund a Series B or C. I raised my Series B round in 2014, and here is what I learned.
Kiss a lot of frogs
Finding the right venture firm requires meeting many of them, since most will pass on the investment no matter how well the company is doing. Whenever I realize there isn’t a fit, I often break up with the firm quickly, sometimes emailing a nice “no thanks” note as I leave their office. This makes company founders feel more in control of a process that is riddled with rejection.
Many venture firms claim to be “growth” stage investors, but that term can mean different things to different people. When you get a call from a VC firm, establish upfront whether they have an established minimum revenue or annual “run rate” in order to make an investment. Some investors will want to see a $5 million to $10 million run rate before they invest. Others won’t care and will base their decision on how fast the company is growing and if they like the market.
Once a company has raised a B round of financing, things become less about the founder and more about the business and its metrics.
For example, if your company is a SaaS (Software as a Service) provider, you should deliver highly detailed reports on things like monthly recurring revenue, annual contract value and customer churn. If your company is a B2C, you should show high levels of user growth and engagement.
Whatever the metrics for your company’s particular industry, have them at the ready when the fundraising process begins.
At this stage, investors expect significant growth in the months and years immediately following their investment. For example, if your company is a SaaS company, you need to show how it will grow at least three times annually in the years following the investment.
Ultimately, investors want to know how fast your company can get to $100 million in revenue so it can IPO or be acquired. If this is not achievable, then think twice about raising a Series B.
It ain’t over until it’s over
Even if a VC firm is interested in funding your company’s next round, there are things to tend to once you’ve received a term sheet.
Due diligence is typically a formality involving a lot of paperwork being sent back and forth, so have good financial records in place. Also, the public announcement of a U.S. fundraising must happen within 30 days of the closing, as it needs to be filed with the federal government.
Be sure to work with a good PR firm or have a solid relationship with a tech writer to tell your company’s story. Don’t let your hard work be ruined by a poor or muddled fundraising story.
Securing a growth stage investment is rare. Most startups never get to this point. But with the right metrics and approach, it can absolutely happen!