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Series A - The Entrepreneur's Audition Test

Decisive minutes, stopwatch on, race against time. A hearing test and a few seconds to demonstrate your full potential. A judging front to make the decision. Among several projects, a single winner. The life of an entrepreneur fits perfectly into the analogy of another actor looking for an opportunity.

Unlike previous fundraising stages, Series A is when the audition is no longer blind. While angel investment or seed money rounds focus on the entrepreneur's history and profile, in addition to a future growth project, series A is the first moment in which the founder needs to open his Pandora's box and truly show the difference of his business looking past and future together.

There are multiple factors that influence success in this process and it is not my intention to explore them all. But experience shows that some specific ones are indispensable. After all, the more mature and consolidated an investment thesis, the lower the luck factor in the jury's decision chain.

1. The first impression is what lasts – the speaker

A common point regardless of the listening test (or the investment round) is the importance of the speaker. We all agree that you cannot miss the timing of an opportunity. However, an ill-prepared narrator is the first to fall into the jury selection funnel.

There are many businesses that receive the famous “non-solicited” from VC funds eager for databases, but there are few who are willing to actually think about how to convey the narrative of their business in a linear and cohesive way to the jury. VCs receive dozens of pitch decks to analyze, but the first selection funnel is based on how the message was said by the entrepreneur.

In theory, it seems simple to know how to tell the story of our life or our projects. And practice a certain speech dozens of times to transform any story into a good story. But VC funds are looking for more than a good project, a well-reported project.

The attitude towards investors, the energy, the ambition, the mastery of the themes, the focus to be given to each of the topics come from a process of trust that the entrepreneur needs to gain from his growth strategy via fundraising, translated into a pitch deck. To achieve this, it is important to align the objectives behind fundraising, the fundamental competitive advantages to grow exponentially in your market and how to present them.

2. The story to be told – the pitch deck

There is no single way to tell a good story, quite the opposite. But there are some themes that guarantee greater interest from the juries at the time of the presentation. I list four very common themes in pitch deck discussion forums for Series A and which, when explained well, add some points to your performance in front of the jury.

(i) Product market fit: perhaps the term most used by investors in this round, it is a way of showing that the product has already been tested, approved and consolidated in a customer portfolio. And there is a lot of discussion in the VC ecosystem about how to prove that a certain product has achieved market fit.

Although some theories talk about ways to prove market fit, what we generally see in pitch decks are practical examples that a certain product is the best in its field. Whether by famous KPIs such as LTV/CAC, churn, retention, conversion, referrals, NPS; for presenting how the product works and comparing it to competitors; for showing a robust customer backlog; for showing examples of engagement and good evaluation of the product with customers; or all of the above.

(ii) T2D3 growth: exponential growth, exponential growth, exponential growth. The expression T2D3 means tripling for two years and then doubling for another three years a company's ARR (annual recurring revenue).

There is a consensus in the market that recurring revenue is one of the items that make it easier for entrepreneurs to achieve high scalability. Grow 20%-30% in monthly revenue as well. And the sum of the two, that is, being in the process of tripling-triple-doubling-doubling-doubling the ARR is the quantitative validator that almost everyone looks for in a deck to make an investment of this nature “eligible”.

(iii) ARR mínimo: There is a lot of debate about the minimum ARR threshold to carry out a Series A. Many businesses in Silicon Valley raised Series A with ARR above US$1 M. Outside this region, but still in the United States, revenue Annual recurring above $2 M is now more common. However, outside the USA, the risk x return for investors makes this barrier a little higher. In recent years we have seen the barrier sit between $3-5M. This is yet another quantitative validator that many look for in a deck.

(iv) Use of proceeds: Funding to grow in what? It is natural that the product needs a sales team, investment in marketing & sales and platform support to scale. Use of proceeds is how much will be spent on each of these variables that the company's cash alone cannot supply to unlock exponential growth.

A company runway model calculates, based on a monthly ARR projection, how much funding the business needs to reach certain levels of growth and how long this new cash will be used by the company to support the estimated growth.

The more organized the allocation of resources and the more aligned your use of proceeds is with the product's organic growth strategy, the lower the risk of the thesis being considered a “fairy tale” by the jury.

All of these themes are data points that help turn any story into a good story. Not all good and well-reported projects are approved, but a bad project is the first to fall through the jury's approval filter.T

3. The jury – the VC funds

Presenting yourself in front of a jury that is looking for a profile completely different from yours represents more than receiving a “no”, it means presenting yourself to the market as unfocused and unprepared for this phase.

A very common mistake made by entrepreneurs in need of cash for short-term growth is to chase all VC funds at once without comparing their thesis with cases already invested or theses that these players are able to invest in.

For a more robust fundraising stage such as Series A, it is important to create an investor screening filtering:

(i) markets in which the fund is exposed;

(ii) check size;

(iii) priority geographies;

(iv) liquidity to make new investments;

(v) high-touch or low-touch performance and what is the post-deal management preference;

(vi) standard check x dilution that the fund generally pays on its investments and whether these values apply to the entrepreneur's fundraising expectations.

4. The remuneration offered – the valuation

Being approved by the jury does not mean closing a deal. The expected remuneration must be well aligned between the parties, even if the deal is approved by the VC fund. Each project has its own context and valuations change a lot between transactions. However, in general, we have seen that the postmoney valuation of Series A deals is between US$5-20 M. While the average dilution for Series A investors is around 20-35%.

These references can be changed based on how strategic the fund is to unlock the venture's growth, how willing the entrepreneur is to execute the deal and how much the company managed to unlock in bootstrap growth. Some examples below:

(i) Valuations with very high multiples, as we have seen happening with technology deals especially over the last 18 months, impose a very high growth trajectory for the business in the future. However, investors have several return protection mechanisms on their investments that guarantee preference over the liquidity of any relevant corporate movement that may follow. In practice, if the growth that the entrepreneur promised in the deck does not come to fruition, the company must forego further portions in shares or cash to guarantee the minimum return on the fund. Which harms the entrepreneur's liquidity in the long term.

(ii) If the portion to be diluted in a fundraising is very high, the original shareholders have less influence over other shareholders in carrying out a new round of fundraising. Several Series A transactions have taken place with a relevant portion in secondary offerings, which guarantee a minimum level of liquidity for the original partners, but leave room for a greater waiver of shares for the funds. Very diluted cap table and high percentages for investors still in the early stages of fundraising make the processes of new fundraising rounds difficult.

All of the above factors must be considered to put together a deal with good economics, which boosts business growth and does not hold back the next rounds of investment.

5. Don’t depend on the hearing test – the company’s cashier

Especially in the last months of 2022, there was a slowdown in VC deals and negotiated multiples when compared to the records of 2021. The VC investment market is still quite liquid when compared to previous years, but we are starting to see it from the funds of VC greater selectivity in projects with greater historical consistency and, mainly, that do not depend exclusively on funding to grow.

The technology case regulations in recent years have focused on growing exponentially in revenue and giving up short-term profitability to scale the business. In times of greater economic uncertainty, like the current one, the word of the moment is “cash”. Focus on the company's organic growth, increased profitability and cash availability to grow alone.

The best course of action for a hearing test at this time is to not need the hearing test. With or without analogies.


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