Let’s start by looking at statistics. Over 50,000 startups receive angel funding each year, and the average angel funding is around $500,000 US. About 1,500 companies get a Series A financing from about 300 active funds, and the average Series A is now approaching $5 MM. Only 150 funds will do more than one deal per quarter, and the average fund is screening over 3,000 deals per year. The statistics are that over 97% of the angel funded companies will fail to raise a Series A. And, you have less than a 0.03% chance of getting a yes from any one VC that you pitch.
Raising a Series A is significantly harder than raising an angel round, and it takes significantly longer. With a 100% focused and dedicated effort of one person, it can take 3 to 6 months to raise an angel round. With a 100% focused and dedicated effort of two people, it can take 6 to 12 months to raise a Series A. Let’s now look at the breakdown of steps to close a Series A.
First, you need to identify all possible investors that do not have a conflicting investment and start to set-up meetings, which may take two months, conservatively. You should start pitching your least desirable prospects first, refining your materials with each pitch, then move on to the actual funds that you want. Next, you will have first meetings with a bunch of funds over the course of another month, ideally pitching between 30 and 60 firms all around the world. You will need to travel frequently.
Hopefully, by the third month, you will start being invited to second meetings with additional partners and staff at the funds. Arranging these meetings will take at least another month, brining the total time investment to four months. If these meetings go well, then you will be invited to pitch the entire partnership, normally on Monday. You need do work in the background to make sure that every partner in the firm supports your deal. Within a couple of days of the big pitch, you may get a term sheet. Fingers crossed.
With a first term sheet in hand, the real work begins. For the next two weeks, you need to work night and day to try and get a second or third term sheet before your first term sheet expires. Term sheets include an exclusive dealings clause, so, once signed, you can’t seek other options. If you are fortunate, you will get another offer, and you will then be able to start negotiating from a position of strength, which can take another couple of weeks.
By the fifth month, if everything goes smoothly, you will have a signed and negotiated term sheet and enter due diligence. During due diligence, the venture capitalist firm will examine every aspect of your business in detail, and you will negotiate the definitive agreement. It’s not uncommon to hire private investigators and put your code through source checks. Due diligence normally takes 30 to 45 days, and some due diligence processes can last up to 90 days, especially if they find a red flag.
The reality is that most steps take longer, and there are blackout periods in July and August, as well as November and December. The average time to raise a Series A is over nine months, since most CEOs take the process too casually at first, Most first-time CEOs need a couple months to ramp up to the necessary level of effort, which is approximately the time of two full-time employees. Let’s close with a look at what is required.
If you are thinking that you want to raise a Series A, make sure that you have at least eight months of operating cash on hand. Venture capitalists will know when you are running gout of money, and they will take advantage of you. It’s a lot easier to go to your existing angels and ask for a couple hundred thousand more dollars to buy you time than it is to negotiate with a venture capitalist from a position of weakness. Trust me.
It’s also important to demonstrate that you have a viable revenue model. The prevailing wisdom is that the angel round proves the thesis of the business and that the first venture round proves the revenue model. Most venture capitalists will want to see good product adoption by potential customers and the beginning of a viable model. Venture capital is mainly used to scale revenue.
Most Graduates that have taken an angel investment will likely need to raise a Series A, and this is quite normal. One way to get a head start is to do a little bit of research on an ongoing basis. Build a list of funds, and keep it up-to-date. Plan to start raising when you have enough money and when you don’t end the process during a blackout period. A little bit of foresight and planning can go a long way.