Jon Bradshaw & Peter Harris

In this episode, we talk about hypothetical situations, based on traction, if a startup could raise a Series A.

Can You Raise a Series A?

In today’s episode, Peter and Jon answer questions such as:

How much annual recurring revenue is needed to raise a Series A?
How many users do you need to raise a Series A?
Is $1,000,000 in revenue enough?

What are the current standards, and has the market changed historical benchmarks? Join us for the podcast to find out!

Episode Transcript

Jon: All right, You ready?

Peter: Do it.

Jon: This is the venture capital podcast. Venture capital firm. If you're looking for a website with Peter Harris, founder, principal partner of the University Growth Fund. And today, we're going to talk about can you raise a series A?

Jon: So here's a hypothetical scenario. Let's approach. So it's August 15th, 2022. Markets crashed. Valuations have changed. Let's say I am a startup that has raised $2 million. Okay, Cap, my question is, is how much traction does that company need roughly for and this is your personal perspective for them to then raise a series A or maybe like a seed, you know, C seed one maybe.

Jon: See to the context of this podcast is I was listening to Jason Lemkin talk about companies that have raised $2 million dollars. And from his perspective, if you raise 2 million and you have not at least hit 1 million in annual recurring revenue in RR, you're toast. You should not fundraise, you should pack up bootstrap. You're sunk at that moment, almost like your growth rate might have somehow picked up significantly.

Peter: Yeah, he's probably right.

Jon: And this is for revenue based companies. Sir, would you agree with the same number as a million?

Peter: Yeah. I mean, I think a million is the flaw. I actually think it might be higher.

Jon: What would you like to see or do you think?

Peter: Well, I mean, here's the thing. So, generally speaking, series A, you want to hit somewhere between 1 to 3 million error rate? Yeah. And that's generally considered the the level at which you're able to demonstrate product market fit. That doesn't mean you actually have achieved product market fit, right? Because you could have like one customer that generates all of that revenue or the bulk of it, right?

Peter: Like we just looked at a deal, it was like that. But it may be that, you know, assuming that you've got lots of customers and like whatever, like once you hit about a million, it's usually about enough traction for for investors to sit up and say, okay, like there's something here worth digging into a little bit more. And they've clearly, like proven that there are enough people wanting to spend enough money on this to solve their problem, right?

Peter: so that's just like the general standard, and that's been the standard for the last, I don't know, probably about four, four or five years.

Jon: Has this a current market change, that standard?

Peter: Well, I don't think the market has changed that standard. I think it might have dipped a little bit lower last year when kind of markets were a little bit crazy and the private side and valuations were going through the roof. But I mean, today, like, that's the standard, right? And so too, to his point, right. If you've raised $2 million, you've deployed it and you haven't in the seed round and you haven't like found yourself like found your business model in the desert kind of thing, to be able to raise that series A is really tough because a lot of investors are looking at their portfolios right now and they're saying, Hey, I'm not going

Peter: to put more money out to work in new deals unless it's really compelling. I'm going to save that money for follow ons and in my own portfolio to support them. And so like if you raised a seed round and you couldn't make it from seed to Series A, there's not a lot of money out there to like give you a second shot at getting to Series A, There's.

Peter: And that's why he's saying like, if you're not going to get a second shot, so you might as well just shut down and start something brand new and raise another like, you know, see if you can raise money for that new idea. Okay. Whether that's fair or not, that's probably true.

Jon: Before we peel back the onion, most people who raise a $2 million seed round. Yeah. Probably had some type of traction. What traction would you guess? They had ten cameras, 8 to 10 camera.

Peter: They're probably some one.

Jon: Hundred and 20 k Ah. So really they're just saying with $2 million you should be able to ten x what you did. Yeah. Not going from this isn't necessarily going from 0 to 1000000 RR, this is going from Mike.

Peter: It could be could, but not necessarily.

Jon: But, but most likely it's statistically it's probably more like 150,000 to at least 1 million to 3 million. Yeah. Okay.

Peter: And look, there's no question that that's really hard. But I mean, welcome to the start of game, right? Like, it's really hard to build these things and they're really risky. And so investors are going to they're going to be like, hey, look, nothing against you, nothing against all your hard work. But like, if you're not accelerating super fast, maybe this isn't the thing.

Peter: Right. Go find something. That is what would.

Jon: Be the growth rate. I mean, in my mind, the growth rate is from like a bunch of podcasts. You need to be going growing at least 15 to 70% month over month or more.

Peter: Yeah, 15 to 20% month over month. But like if you're growing 15 to 20% month over month from 100 K, you'll hit that right. You'll hit more than that. By the time you get to your.

Jon: Get your series A if you're doing 1000000 to 3 million, you still want to see 15 to 20% growth month over month.

Peter: Yeah, I mean, ideally you want to see as high growth as you can get, right?

Jon: Right. But what's the flaw? Hey, I shouldn't fundraise. Our revenue is not high enough. Our our growth rate or it's not high enough versus I've got a shot to a great shot because from RR you're saying $1,000,000 is like your baseline. 3 million plus is a great shot. If you raise 2 million. Yeah, in in a scenario of of also just growth rate you're saying 17 to 20 is kind of like the probably the the floor.

Peter: Yeah probably.

Jon: And that's month over month.

Peter: Yeah. I mean you probably need to be like you probably need to be at least 100% year over year. So in that range you're talking more like 8 to 10% month over month. but that's like the floor.

Jon: 8 to 10 is.

Peter: If you're not growing 100% month over or year over year like it's going to be, yeah, it's going to be really tough at that stage. Yeah. I think 100% is like kind of the flaw. I see most companies today, they'll grow from, call it 200 K to upwards of like 1 to 2 million. And then from there, like 1 to 2 to like 5 to 7, 5 to 7 to like 12 to 14.

Peter: Right? Like.

Jon: Okay.

Peter: So I mean, you know, it's there might be like ten X and then like three X and then 100% and then they maintain a basically 100%. It might dip down a little bit. But yeah, they'll maintain that as they grow. And then once you hit about 100, 100 million, you know, things slow down, it is manageable. Maybe growing like 60% by then a 4040 to 60%.

Peter: But at that point you can go public on those numbers.

Jon: What about for non for do do do because back I mean the answer is yes. But as a general rule, RBC is backing non-revenue plays. So user generated models.

Peter: Yes, they are.

Jon: What would they be looking for numbers there? Hey, I'm going to raise a series A I've raised 2 million so far. What type of growth or metrics are they looking for?

Peter: So in that case, I mean, they're really looking for users and engagement, right. And the ability to flip a revenue switch in the future.

Jon: Okay. So what would that look like? Average 2 million.

Peter: Like we're looking like like we just looked at a company that that I think is super interesting and their model is basically, hey, we're going to we're going to get a bunch of users to use our product for this one thing, and it'll be kind of a Trojan horse strategy so that once we get enough of them, will like tack on this other product that they will be excited to use because we'll have all this data and like it'll really play nicely with the things that are important to them and that's what we're really going to monetize, right?

Peter: But for now, like they've got I mean, they'll have millions of users, but they have thousands of users, but they're adding like thousands of users every month. And so, like I look at it for us, it ended up being too early. But I mean, they are the I mean, they have a oversubscribed round. They're going to they're going to close that.

Peter: They're going to do great. And they've got some great VCs in there. And I think the reason for that is the VCs can see a very clear path to turning on a revenue switch, and they're seeing really strong growth in both users and engagement. So it's really going to depend on your business right for them. They're like B2B.

Peter: So thousands of customers, potential customers is really compelling.

Jon: I think if you're like per month that are signing up right now.

Peter: Yeah. So from the time that we started looking at them to like today, they added, I think like 1500, and that was over the course of like a month and a half or so or roughly a month. So yeah, they're adding about a thousand new users per month. So but look, if you're doing B2C, I mean the scale is way, way bigger, right?

Peter: Because B2B, you might be generating tens of thousands of dollars per customer B2C, you might be generating tens of dollars per customer on average. So, you know, you've got to have that order of magnitude greater numbers of people.

Jon: Okay. Would a company like, you know, Rick Garrett use company IT and Kirk Point Kirk we Mitt's Oakland since last name Garrett and Kirk's will skip up the remote part with scandal at me would they have been funded in today's market.

Peter: like I think like would their exact same company get funded? No. But what were they out like a million users when they sold?

Jon: No, I don't know the metric that's hoping that you might have seen the numbers.

Peter: And that I would disclose them here.

Jon: Not that you disclosed them, but you'd have an idea.

Peter: Yeah, I mean, based on the numbers that I'm familiar with.

Jon: Because back in the 2010.

Peter: Look, I think.

Jon: Of growth at all costs. Just get users, don't worry about monetizing. And I feel like that ship, at least temporarily, has passed that.

Peter: That's probably true. I think I think well, here's the thing. On the one hand, there's never been more money chasing deals, so and there's never been more tools for people to track companies like that. Right. So if you had a company like Scan that was growing really fast, and had like, you know, a decent threshold of users, then I think, yeah, VCs would pay attention to that.

Peter: And there's so much money and so many funds out there. Yeah, they probably would have gotten funded in this environment. the flipside is I think it's much more difficult now and they weren't, they wouldn't get the valuation that they would have gotten last year or the year before maybe. Okay. Right. Like, you know, I was just talking to an entrepreneur the other day and he's had to cut his valuation like three times to get to a point where he could get a deal done.

Peter: So it's it's a tougher market, especially if you don't have the traction, especially if you're burning a lot of money. So, I mean, that's the thing that I think is interesting about this other company that's more B2B, is that it's I mean, their burn is basically nonexistent because there's two guys as bootstrapping and they don't pay themselves anything.

Jon: Okay. So the good spot to be in a good.

Peter: Spot to be in, right?

Jon: Yeah. What other metrics would you expect to see in general or outside of that that you may want to talk about? For someone who's raised 2 million looking to raise a series at.

Peter: Some other metrics,

Jon: To like look at.

Peter: Well, so okay, so if you want to raise a series A, you probably want to be at, like I said, 1 to 3 million RR, You're going to want that revenue to be pretty diversified, spread out among customers so you don't have too much concentration.

Jon: A minimum like, say, ten.

Peter: Ten. I mean, that's like 100. I mean, that's that's a really healthy ACV. But I would I would want to see more than ten. I'd want to see like, I mean, it really depends on the business, right? But if you're like B2B SAS, I don't know, like probably like 20.

Jon: 20.

Peter: Twentieths customers, you'd want to see some good renewals already in the bag, right? So, you know, obviously you're still news, you don't have a ton, but you'd want to like clear that threshold. Like this is a problem that one of one of the companies we're looking at has like they're growing insanely fast. They're probably growing like 30% month over month.

Peter: But they they haven't gone through a renewal cycle yet. So a lot of VCs are looking at being like, Hey, your growth is phenomenal. We don't know if people are going to renew. Right? And so that's kind of it's kind of been a struggle for them until they get some of these renewals under their belt. so that's part of it.

Peter: I would be looking for, you know, a pretty solid team with clear ID of where the holes are and you know, what you're going to add and where and how you're going to spend that money. And you know, probably need to have a pretty well fleshed out product by then as well. So, you know, you're not having to add I mean, like your products are always going to evolve, so that's fine.

Peter: But it shouldn't it shouldn't require a ton more work. It shouldn't be like held together with duct tape and and wire. Right. For those 20 customers, like, it's actually got to be like a pretty solid product that can scale with them.

Jon: Okay, Well, this is a great feedback. Peter, anything else you want to add to this podcast?

Peter: No. Well, look, if you're an entrepreneur and you're in the situation where you raised 2 million bucks, but you're not quite at 1 to 2, I think, you know, having some, you know, real personal time to figure out what who you are and what this is going to look like is important. Do you keep chasing the dream? Do you cut your losses?

Peter: Because time life is short, time is valuable and you're better off starting something new. Can you get money from your insiders? Right. And did you do a good job kind of picking investors at the early stages that could continue to support you to get you to that series around, get you to that 1 to 2 million? I think the next 6 to 12 months are going to be tough.

Peter: I think you're going to see a lot more down rounds. A lot of you know, I'm already seeing bird rounds across the board, even for companies that are very healthy, very strong. So I you know, I anticipate that'll continue. And probably what he was saying is that, you know, even strong companies are kind of struggling. So if you're not a strong company, it's going to be real tough.

Peter: So anyways, sorry to be a Debbie Downer.

Jon: Those is good. This is great feedback because I think a lot of people don't hear this type of information. Yeah, and it's good knowing like, what am I looking at? Do I go for easy finding or do I just spend time looking for my next client? Yeah.

Peter: I will say always, client money is more valuable than DC money.

Jon: I've also been biased that I feel like it's easier to always get another client than to raise venture funding.

Peter: Yeah, but the flip side is your average client is not going to write a $10 million check. Correct. So that's a tradeoff.

Jon: Most startups don't don't ever see a $10 million check. It's true. It's true. All right. Well, thanks, Peter. Go to venture capital firm if you want to subscribe. We've got Spotify, Apple Podcasts. Please leave a review. It's what helps us grow this podcast even more. So thank you so much. If you have questions, make sure you hit us up in the comments.

Peter: Thanks, everybody.

Jon: All right, Bye.

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Can You Raise a Series A?

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