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Building A Startup – Phase III – Seed Round to Series A

In the last article, we talked about getting to a Seed Investment with the F&F money. At that point, if you had done all your homework, had a solid tech with IP protection, a utility patent, a solid product demo and customers vouching that they will use it, a solid business pitch and plan that showed where your market is and how you plan to get there, and a core founding team that complements each other, plus advisors waiting in the wings that could join the team when you are funded, you should have raised a seed round of a few million. Otherwise, go back and keep trying because you need that money for this phase to get to your Series A.

Before getting to Series A, you need to mature your company, including its tech, roadmap, product, markets, financials and business plan to the point that you are a real company, with a real product, professional sales and marketing, and show you have a plan to get it to market to your initial customers. What you are then going to ask for is money to more fully penetrate that market by adding features to your product to make it more competitive, and add a marketing and sales budget to better sell it into that market and to start planning how to get it into other markets, maybe with variants of the product. Series A is all about being scalable. Investors want to see that your company can scale to $250M in sales and get a $1B valuation in less than 5 years, otherwise they will pass. You need the product plan and market plan that can do this, like you did in Seed, but now it has to be much more solid, evidenced and professionally written. Pretend you are going to go IPO and you need a full company plan showing your next 5 years for achieving this goal to those standards. It’s OK to bring back your global domination pitch deck and see what else you can glean from it, as now is the time to use those ideas. Post-series A is your biggest expansion.

Fill out a top management team with all the cross-disciplinary skills to get your company from here to IPO and beyond. That will be the team that can plan this venture to that goal and execute on the plan to take it there.

Then, when everything is firing on all cylinders, start getting introductions to the VCs you want to target as your investors. Your law firm, temp CFO, and partner companies can help you do this. Most big corporations have a venture branch, and they will invest in series A for companies that have technologies or products that complement their own. They are easier to access and will bring in institutional VC investors and even vet your product, technology, and market to those investors as they know it better and are a trusted source of information for those investors.

Go to investor events, leverage your accelerator/business class contacts. When you are invited to pitch to an investor, do a concise, but quality first pitch, then tell them you don't need their money yet, you are just looking for feedback from them and other investors so you can come back in a month and show them a pitch and company that is really ready for a Series ‘A' investment of $10M, with X and Y about your company further along, and in a much stronger place.

They were going to tell you this anyway, and you just pre-empted them, played hard to get, and showed them you are ready for a real courtship and not humping their leg for investment like the dreaded rabid entrepreneur. Plus, investors love to hear you want feedback, and will give you as much as you can take, and they have a lot of experience, so take it seriously and implement it. If you need to hire some company officers, especially a CFO, ask if they want to recommend someone and get them involved. Your future investors will look on your business plan less harshly and will help you fill in the missing gaps. They will feel like part of the team and get a chance to work with you, which is a try-out for how you WILL be working together day-to-day after they invest. This will be a long-term relationship and now you are dating, not just slinging lines at them. Be sure to get business cards from everyone.

Follow up every couple of weeks with a brief update. Show your progress, send them links of keypress that you generated (one bit at a time, you are teasing them, not smothering them) with your PR campaign. Give each partner a bit of different news so they have something to talk about when they meet and some surprises when they share info. It's more fun when they put the pieces together themselves and they figure out the whole picture and real potential. Show them what you have improved to date and ask them for advice on one or two points that need improving. They will like doing this, and again, it builds the relationship and gets them involved, as long as you do not take too much of their time. VCs are busy people and will quickly block someone who annoys them.

Showing traction like this between investor meetings is important. They not only want to see your pitch and where your company is now but see how you trend between meetings. Are you really able to execute your plan and grow like you say or are you just talking the talk and will be showing the same pitch month after month? Can you do it without their money? Are you resourceful? Are you even going to survive to pitch again in 6-weeks? Real, live, between-meeting traction speaks volumes and is a very important metric for investors to know you can do this. They also don’t want you to succeed too quickly and get away from them before they can invest.

Land another key customer (or announce one that you have not until now), file a new patent, generate some more media coverage, and contact your VCs and tell them you would like a meeting to pitch because there have been some exciting developments, and then it is GO time. Get real traction, and have something real to tell them because VC’s can smell BS a mile away and will not invest in you if you over-hyped and under-delivered, which is not promising CEO behavior anyway, especially if you want to IPO.

Now give your improved pitch and ask for $20M, as you will have $10M in your bank from your contracts in a few months so why ask for $10M now. Then ask your prospective investors: ‘Do I really even need to raise a VC round? What are the advantages?” They will now sell you on all the reasons you need a VC round, and why their firm should be the one to do it. Tell them you like the idea, and ask them if they are in for $5M of the total $20M round as you have several other investors that would like to get in (make sure you are really pitching them too as these investors will check and compare notes). It is actually common practice to have multiple investors in a round to spread out risk, plus if you include one bitter rival in your list of other investors, they will work harder to convince you to take $10M from their firm rather than go to their rival for that last $5M as they do not want to work with them.

You CANNOT just throw this together, nor force it to happen, nor fake it. You have to pre-plan this months in advance for your technology, products, demos and business plan to all converge, to have key customers lined up by the right times, and to have your PR firm getting all this in the media just when you want to peak for your investors.

This is NOT gaming the system, cheating or deceiving your investors. You have to tell the 100 percent truth at ALL times or you will lose credibility forever. This is just focusing that truth, like a magnifying glass focusing on the sun, on a specific point in time to have maximum effect. You must peak at the right time for your target market to receive it. You will have to get good at this as this is how you will do all your product launches and you will do it over and over in your corporate career. In this case, your company IS the product and you will do multiple rounds like this and doing this constantly to keep selling your company to the public once you IPO.

And thus begins your venture funding round. To close the deal, use a very well-known and respected LARGE law firm, both to prove to your investors that you are serious and to give them comfort in working with a good law firm during the close that is going to be tough, firm, but fair, and do a good job, because they do a lot of business with these firms. Close your round with a fair deal, giving decent equity and avoiding any clauses that give investors all the money at exit, and not the founders. VCs are sneaky and will try, as this is how they sometimes salvage failing companies in a fire sale, to get as much investment back as possible. You need to convince them that your company will not be one of these basket cases, and fair terms are better for motivating everyone. Having a good law firm and actually going into terms sheets with six investors when you only need four, so you can turn down the ones that give undesirable terms, is also an option. Just be open about it to all the investors as you don't want to get a bad name with ANY investor.

That is some hard won-advice from doing this three times now and studying how to do it right with a lot of business classes and excellent mentors. Use this information well.

 

Author bio

Brent Oster

This 3-part series has been by Brent Oster CEO od ORBAI- www.orbai.com

 

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