Interview with a VC — Defining Series A Readiness

For growing tech companies, securing investment that allows you to scale is an ongoing concern. And it’s not just about getting cash in the bank — it’s critical to find partners who believe in your vision and will support your business as you scale.

Many of our clients are growing tech companies who are either actively seeking or have recently secured Series A funding. While this is an exciting time for an organization, it's also one that can be fraught with challenges.

We sat down with Dave Unsworth, Co-Founder and General Partner of Information Venture Partners, who primarily invest in Series A ready B2B FinTech companies across North America. With a number of successful exits under their belts (like the acquisition of Adaptive Insights by Workday Inc. for $1.6B, a lucrative exit from Igloo Software, and the acquisition of Varicent by IBM) Information VP is a fixture in the Canadian VC landscape.  

In this article, Dave discusses the criteria that Information VP uses to benchmark Series A readiness, as well as some advice he’d give to Founders and C-level executives who are looking to secure investment.

5 Criteria for Series A Readiness

Every VC firm will have their own benchmarks and terms for what makes a deal attractive, so if you’re seeking investment for your company, you should certainly do your research and make sure that you’re pitching potential partners who are aligned with your business. However, these are 5 common criteria VCs look from when judging Series A readiness.

1. A Strong Team Led by a Franchise Player

An organization that is ready for Series A funding will likely have hit a few key milestones in the course of their evolution. One of these critical achievements is having a team in place that’s starting to gel and execute effectively.

For Information VP, one of the most important things they look for is what Unsworth calls a “franchise player”— a founding member of the team that can paint a compelling picture of what the company is doing and why they’re going to win.

It’s critical for someone to be that franchise player so they can attract the best talent. At the end of the day, the companies that win have the best teams and the companies that don’t, don’t. We’ve seen it over and over. You can see franchise players across Information VP's portfolio of investments with people like Corey Gross at Sensibill, or Katherine Regnier at Coconut Software.

2. A Repeatable Use Case

Unsworth and his team seek out solutions with an established and repeatable use case, and customers that can be called to validate that story. They are looking for a consistent story that illustrates what winning looks like for the customer.

“We like to see things that are highly repeatable, the same buyer, the same buyer titles, the same problem, and a company that’s able to sell that over and over and over again. That repeatability, or that early evidence of a repeatable sales cycle, is a key factor in what we look at for a Series A. Usually for us, those companies are approaching about $1MM in annual recurring revenue, so that’s a bottom watermark for us.”

It's also worth noting that there are great examples of successful companies with multiple use cases and customer stories, and that other VCs may seek out organizations with these multiple customer journeys. Each VC will have their own criteria and investment thesis, so it’s smart to do your research before pitching.

3. Size and State of the Market

Information VP looks for a combination of factors in the size and state of the market. They often shy away from companies that are the first entry into a market.

“We may lose out on some big outcomes as a result of our stance, but we’ve been in companies where they’re the first solution in a market, and they’re trying to build a new class of software—and that’s a very long way to go. When you have incumbents that are either legacy vendors or competitors, then you’ve got people educating the market about why they need this software.”

4. Deal Terms that Work for Everyone

For Series A, there is a balance between the size of the cheque, the valuation that an organization expects, and the size of ownership a VC is likely to take. Entrepreneurs and VCs often have different ideas about what makes an acceptable arrangement, but for Information VP, they prefer to invest in the 15 - 20% ownership range. This helps them to pay back a multiple of the fund from just one big exit. Of course, those terms also need to be appealing to Founders so there’s a balance to strike.

5. A Founding Team that is Open to Support

Lastly, Information VP looks to invest in organizations who are open to involvement from their investors.

“We tend to shy away from people who would otherwise be franchise players, but believe they already know everything and don’t want any help. Our model isn’t a light touch model, and we like to be very involved with our companies. We build a very concentrated portfolio—we don’t do 50 deals at a time, we do 12 to 15. So, we want 12 to 15 teams that are interested in what we have to say and what help we can provide. If it’s an entrepreneur that doesn’t want that, that’s ok, but we just might not be the right partner for that entrepreneur. Of course, the level of our involvement varies dramatically—if you’re a first time CEO fresh out of school, versus someone who’s taken a company public, the kind of help will change, but we’ll still have that active dialogue.”

Support can really help young companies. As things evolve and change so rapidly, no one can truly know it all, and this exchange of information can help VCs to continue their education in the market and refine their investment thesis.

These five criteria are what the Information VP team use to guide them as they select organizations. Of course, each investor will have their own investment thesis — the niche, stage of organization, and specific criteria they use to define investment readiness.

Common Pitfalls that Kill Deals

There are some common mistakes and missteps organizations can make when they are seeking investment capital. Unsworth has shared a few pitfalls that typically get in the way of doing a deal.

Bloated Valuation from Pre-Series A Investment

Especially in the FinTech space, it’s common for companies to have raised a lot of capital in Pre-Series A rounds, and to have burned through it before they begin to display the qualities critical for Series A readiness. This creates a challenge in structuring deal terms as with that much initial investment, it’s difficult to agree on a valuation for the company that works for many VCs.

“We haven’t done well in the past when we’ve overpaid or gotten involved with companies that have a capital inefficient structure. In our view, until you are able to start doing that repeatable sales process and can show that revenue can come in through the door, then it’s hard for us to get behind that team.”

Not Nailing the Pitch

Unsworth and his team see a lot of pitches, upwards of 1000 per year. His advice? Less is more. Within the first one or two slides, it needs to be crystal clear to the investor what the company does, why they’re doing it, and why it’s important. If you can’t do that, then how will you be able to communicate that to your customer?

Being Dismissive About Competition

Founders seeking funding should be realistic about the landscape of the market they’re working within.

“A lot of people are very dismissive, or don’t want to talk about competition at all. The famous line is ‘well, we don’t have any competitors.’ Often, if you don’t have any competitors, it’s because you’re chasing a market that isn’t worth chasing—not always, but 99% of the time that’s going to be true.”

Advice for Founders

We also talked about the advice Unsworth would give to Founders who are looking to secure Series A investment. His advice? Look in the rearview mirror. From the time you start the company, raising capital is part of a Founder’s objectives.

Have you nurtured relationships with funds in your space who want to get to know your story and help you in your evolution? Don’t wait until you’re going to run out of money to start building those relationships. Work hard to get warm introductions through your network so when the times does come VCs are willing to pay attention to your pitch. And, while you’re nurturing and building those relationships, keep in mind that VCs take a lot of notes, and have long memories.

“If you’ve Founded your company and told us you’re going to do $10MM in your first year and come back to pitch Series A and you’ve only done $500K, that’s a problem. It just destroys your credibility when you come back in and have to say ‘yeah, but.’ It would be much better to initially say that you’re going to do $1MM in your first year, and then hit $990K—that shows us we have someone who can execute.”

Unsworth recommends taking a reasonable and conservative approach to the way you talk about your business. VCs look for entrepreneurs who have discipline around the way they talk about their business and their prospects, along with a track-record of building proof points and successful outcomes.

Securing Series A fund is an exciting time for growing companies — it often allows organizations to accelerate their growth, scale their teams and increase market share. While every VC will have a unique investment thesis, these insights from a successful VC can help demystify the process of securing capital to grow your business.

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