28th Aug 2020

Raising a Series B: Fundraising

As a Seed and Series A investor, we put a lot of focus on helping our portfolio companies to become 'Series B ready'. We're distilling this advice into a series of private sessions for our portfolio with founders and growth investors who have been through the journey, and we'd love to share some of what we're all learning.

Over the coming weeks, we'll be running sessions and sharing insights in areas including fundraising, product readiness, getting your go-to-market in good shape, and building a Series B-ready management team.

The first in our series was a session on how best to approach Series B fundraising. We had the pleasure of hosting Husayn Kassai, CEO and Co-Founder at Onfido, and Rytis Vitkauskas, Partner at Lightspeed Venture Partners, together with MMC's Dan Bailey.

TL;DR fundraising tips from Husayn Kassai, CEO and Co-Founder at Onfido:

  • Start early
  • Tell a story
  • Ensure Fund-Founder fit
  • Present in person and speak to partners only
  • Create momentum
  • Move the cohort forward together - speak to a group of funds at the same time so they issue term sheets at the same time. That way you can make it competitive and time-efficient.
  • Force their hand - for funds who are sitting back and waiting for someone else to make a move or set a price, create an appropriate deadline and ask for firm commitments.
  • Negotiate, and don't reveal price
  • Have everything in each term sheet detailed
  • Leverage flexibility, i.e. second or rolling closes or notes

Get the timing right

It's a fairly obvious point that if you are starting to think about your Series B, you should be confident in your product-market fit or at least close to achieving it.

These are some of the basic high-level metrics that investors will consider when assessing maturity/ readiness:

  • Revenue (if it is a monetised platform)
  • Number of customers, users, seats etc.
  • Indication of growth rate, ideally from channels that are scalable and sustainable
  • Indications of adoption or user engagement, and that customers/ users are getting value
  • Gross margins and unit economics

But there are no hard and fast rules on metrics. It isn't just about hitting a specific ARR threshold.

Know who you are talking to

Having the background on the individual and fund you're pitching to is important at every stage. At Series B there may be increasing diversification in the funds that you are speaking to as strategies may vary more widely than in earlier rounds of funding, and a few characteristics may be more influential than in earlier stages:

  • Growth Equity vs Venture Mindset: At Seed and Series A most investors have a similar mindset of looking for 'fund returners' and focus on a venture risk return profile, but this can diverge in later rounds of funding. Do they take a more traditional growth equity approach where they're looking for consistent 2-3x minimum returns on all their investments and occasional outliers, or do they have a venture mindset of looking for fund returning investments at Series B stage.
  • Fund Size and Strategy: How big is the fund the investor is deploying and what % of the fund are they committing to invest in this round (and expecting to invest in follow on). Multi-stage VCs may be looking for the potential to invest several times more capital than their original investment in follow on funding, whereas stage-specific investors may be making a significant commitment for their fund in the Series B cheque.
  • Generalist vs. Specialist: The number of sector specialist funds tends to decrease as fund sizes grow and they focus on later stage, but there are a number of exceptions across industries and within larger funds there are often individuals or teams that operate relatively independently within their areas of focus.

The story you tell, metrics to emphasis and the size and nature of your 'ask' might be different for these groups. Just like any sales process, adapt your approach to the audience.

Sell your story

Having a well-articulated vision for your business is crucial at every stage of development. It's worth spending time on getting your 'Series B story' right before going out to raise. This might be different from how you've been describing your business or progress up to now.

Investors see hundreds of companies each month so it is essential to be as clear as possible on the narrative behind your vision and the scale of the opportunity in order to stand out.

Confidence is also key here. The ability to generate buy-in from investors and persuade them that your company and vision merit investment requires you to have a high degree of self-belief in both the business and the opportunity at stake.

There is no hiding from the numbers at Series B like you can earlier in the journey. Investors expect real metrics and financial information and will ask for detailed breakdowns and cohort data to slice and dice. Think carefully about which metrics to emphasise early and which to reveal as you go through the process - this needs to be transparent and coherent all the way through while allowing you to generate excitement early and put any challenges in the proper context.

Build relationships well ahead of time

It's important for the founder / CEO to build and maintain relationships with investors well ahead of time. Those who have been engaged and excited from earlier in the journey can be some of the strongest candidates to lead your round.

Founders have different styles around this. Some are very structured, with formal catch-ups and regular mail-outs. Others have a more natural approach with ad-hoc, un-prompted catch-ups and regular calls for advice. With either approach, make sure to gather introductions, thoughts, trend observations and information on the market and competitors.

If you're having these catch-up calls you should seek to utilise their portfolio. Pick two or three relevant portfolio companies and make reference to them as potential customers. Follow-up with an email to the investor asking for an introduction, and be sure to follow through and impress that prospect. If you're able to convert (and secure a positive reference), or just have a positive interaction, this can provide a big confidence boost to the investor.

I got 50 funds to do this and at the start, three-quarters of our pipeline came from introductions from those funds. It's a missed opportunity if you haven't asked!

If it doesn't work out with a partner but you spent a lot of time with them and you enjoyed the interaction then stay in touch. It's rarely a perpetual 'no', and even if you pass them by stage-wise, investors chat and a positive word in the right ear can be helpful.

Finally - you may have been able to raise your Series A on the basis of your vision, founding team and early traction. At Series B the metrics will probably speak for themselves a little more. So at the Series B there is more opportunity to have someone else in the team shoulder some of that burden and help you manage the fundraise, rather than relying solely on the co-founders.

Choose the right partner

One of the most consistent pieces of advice we hear (and give) is the importance of choosing the right investor - individual and firm. Arguably this is even more important as we head into uncertain and in many ways, unprecedented times.

“You want to emerge from this time with a cap table you are happy with and a partner that will stick with you and is there for the long term.

But how do you choose that partner? Specialism can be a helpful consideration. In reality, there are very few 'mega-generalist' firms that are able to offer world-class internal speciality in all market areas. There are, however, many Series B-stage investors who offer sector or domain specialism relevant to your journey. Typically, they will add significant value through their deep market knowledge and experience; knowing the right questions to ask and challenging you on the right way to operate, without wasting your time; and bringing candidates, experts and prospective customers, partners and acquirers specific to your space.

There is a second type of specialist firm, the 'functional specialist'. These organisations will hone in on specific business functions such as recruitment or go-to-market and offer advice and help with that function, for example scaling your sales team or building a network of channel partners.

In some ways, strategic investors will have the greatest level of specialism. However, bear in mind that sometimes having a strategic investor can create its own challenges or conflicts. That could be the subject of a whole separate post, but suffice to say having Walmart or HSBC as an investor means you probably won't be working with Amazon or Barclays. Conversely, having two or three separate strategics involved (maybe even direct competitors) may work to your advantage.

While many firms will bring a 'whole team' approach to their portfolio relationships, inevitably this will be concentrated around the specific individual partner at the firm you choose. So it is important to focus at least as much on that individual, as on the firm. Talk to entrepreneurs that have worked with them (be wary of VCs who are protective over which references you take). What do they say about them in action? Where have they been valuable and less so? How do they behave when things get tough, or the business underperforms? Are they proactive or reactive? Are they thoughtful and prepared? Do they have enough time, or sit on too many boards?

What about Covid-19?

Unsurprisingly Covid-19's impact on the fundraising landscape came up.

The consensus was that in March and April there was a meaningful impact on the growth financing world but activity has picked up again since May.

An important new question that investors are asking in a post-Covid world is "How resilient are you?" Investors want to see that you are able to weather shocks and adapt to a changing landscape. It might be useful to openly discuss how you adapted through lockdown, even if the business suffered setbacks.

In the next session we will be talking to Gaurav Kotak, VP Product at Showpad and Blake Bartlett, Partner at OpenView (a product-led VC) as we dive in on product, how the product management function changes as companies scale, and how all things product are assessed in fundraising processes.

Following that, we'll be running sessions on:

  • Go to market (GTM) and metrics: How VCs assess the GTM function and what metrics they are most focused on.
  • Talent: What senior leadership needs to be in place by the time funding is raised and how talent acquisition and retention are assessed.

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