The Metrics Required for Raising a Series A Round
Sep 17th, 2014
After closing our seed round a few months back, my co-founders and I decided to figure out what traction we'd need to reach the next fundraising milestone, Series A. I was surprised to find that there's not a great single resource on the internet that sets out current market VC expectations for Series A companies. So we're now providing that resource. We did a lot of digging into this, including asking mentors, current investors, and prospective investors. Here's what we found.
Series A is an order of magnitude greater, in terms of diligence and required metrics, than the seed round. Current market conditions--the Series A Crunch--don't help either. There is a lot of capital available for seed rounds, with a new micro-VC fund seemingly popping up daily, and AngelList, SeedInvest, etc. also adding to the pool of capital ready to deploy for seed investments. But Series A involves big institutional players, who have strict mandates and fiduciary duties to their LPs. The bar is set much higher to raise your A round than was required for your seed round.
Through our research, here's what we've found vis-a-vis metrics needed to raise a Series A round from institutional venture investors.
General. Let's start with an important caveat: there is not one set of metrics that applies to every business and we can't paint all investors with a single broad stroke. Below are general guidelines that are broadly applicable and further down I discuss sector-specific metrics.
- Product/market fit. What is product-market fit? It has been discussed ad nauseum by many thought leaders, including Marc Andreessen, but I like Andrew Chen's elegant take: when people who know they want your product are happy with what you're offering.
- Proof of repeatable business and large market demand provable by data. You need a productized, not customized, offering customers are paying for.
- Clear path to scale and new business acquisition.
- Identify customer acquisition cost and customer lifetime value. Naturally, these metrics should point to customer profitability.
E-commerce. This is a dense market, with diminishing margins, and heavy-weight incumbents (see Amazon). Also, VCs are licking their wounds from companies like Fab and Gilt (wasn't Gilt supposed to IPO for the last 4 years?).
- $1 million monthly recurring revenue (MRR) is the key metric here.
Consumer Apps. Another crowded field and the shadow of King Digital looms.
- 50K daily active users.
- 25% month-over-month (MoM) user growth.
SaaS. Jason Lemkin (the SaaStr himself, of Storm Ventures) has noted the following:
- $50-150K MRR.
- > 100% YoY growth on MRR or annual run rate (ARR) basis.
We've built PayRight, a B2B SaaS tool for companies to efficiently manage their equity and cash compensation. Naturally, we've looked into B2B SaaS-specific metrics:
- $1.5MM ARR.
Marketplace. Marketplaces are tricky (trust us, we know) because of the chicken/egg problem with supply and demand (buyers want to see good supply, and good sellers will list where there are buyers). It is understood that liquid marketplaces also take a while to build.
- $500K-$1 million in monthly gross market volume (GMV).
- 20-30% MoM growth in GMV.
- Liquidity: > 10% demand/supply ratio.
- Transaction velocity: the time it takes to have a transaction clear should be decreasing.